Now It's The ECB’s Turn

After several days of focus on what the Fed was going to do, yesterday it was the turn of the ECB. Benoit Coeure, the ECB Council member responsible for money markets and executing ECB monetary policy, said that the ECB’s stance “will remain accommodative for as long as needed” and that the ECB has “an open mind” about non-standard policy tools.

These are the usual comments that we’ve heard from ECB Council members recently. He also made the point that the ECB is watching the entire term structure, not just short rates. This tied in with ECB President Draghi’s comments; he said that outright monetary transactions (OMT), the ECB’s pledge to buy up the bonds of troubled countries if necessary, “is even more essential now as we see potential changes in the monetary policy stance with associated uncertainty in other jurisdictions of the integrated global economy.”

In other words, the ECB stands ready to depress long-term yields if necessary to keep the Eurozone economy on a recovery path while the Fed “tapers off” QE. Given the relatively good correlation between EUR/USD and the real two-year bond spread between Bunds and Treasuries, this suggests a lower EUR/USD going forward. The single currency could come under some pressure ahead of next week’s ECB council meeting.
EUR/USD" width="601" height="361">
Fears of a melt-down in China were relieved somewhat yesterday after the People’s Bank of China (PBOC), the nation’s central bank, stepped in to alleviate the crunch in the money market and Shanghai stocks closed almost flat. This may have helped to reverse some recent risk-off behavior and the biggest gainers overnight were the currencies that have been among the biggest losers recently, namely SEK, NOK, and AUD. But today the Shanghai market is again down today even after the PBOC said it will use tools to safeguard stability in the money markets, suggesting that not everyone in China is reassured.

There are no major economic indicators out today, only the final figures for French and US GDP.

The Market

EUR/USD
EUR/USD" width="1602" height="808">
• The dovish statements from ECB Council members, combined with much higher-than-expected durable goods orders in the U.S. for May saw EUR/USD retrace from resistance. The higher than expected S&P/Case-Schiller Home Price Index and the most new home sales since the post-Lehman era, ahead of today’s MBA mortgage applications, confirmed the strength of the US housing market rebound, with Conference Board consumer confidence rising to a 5 ½ year high. The data added to the signs of a US recovery that have market participants anticipating a scale back of quantitative easing, driving EUR/USD to notable 1.3075 Fibonacci and 50- as well as 200-day MA support.

• Having broken 1.3075 we have entered an area of concentrated past price action that holds till 1.2875. Fibonacci resistance comes at 1.3075 and 1.3115 with weak support at 1.3055, 1.3030, 1.3005, and 1.2980.

USD/JPY
USD/JPY" width="1598" height="811">
• USD/JPY rebounded from 97.05 support on the across-the-board strong U.S. data and the lessening of concerns in China following soothing words by the PBOC. However, a retracement from trendline resistance at 98.20 occurred following a run to havens as the Shanghai Composite is shedding more than 1.5% today, having crashed in June losing 16% whilst breaking down from key 4 ½-year low support at 1950.

• Resistance above the Fibonacci 97.90 level comes at 98.20, thereafter at 98.8 and later in the 99.15 – 99.35 area that also sees the 50-day MA. Support comes at the tested 97.05 level and thereafter at 96.40 with a possible divergence occurring between the price increases and the downward sloping Stochastic oscillator.

USD/CAD
USD/CAD" width="1604" height="806">
• USD/CAD is continuing to rally following the breakout from its three-year old triangle formation, currently testing an almost two year highs, with spike resistance at 1.0650.

• The longer term price target set by the triangle breakout is 1.13, which is a long way from the current levels. 1.0470 is a tested support level with trendline support at 1.0415.

Gold

• Gold moved lower following the release of strong US data that increase the likelihood of an end to Fed stimulus by mid-2014. The break of the $1269 recent low triggered a breakdown with support coming at the weak $1244 level.

• Former $1269 support is likely to turn resistance with resistance thereafter in the $1285 – 1289 area. Support below $1244 may come at the formerly tested $1228 level, with key support at $1160.

Oil

• WTI retraced from $96.05 resistance as the dollar strengthened following the better than expected US durable goods orders, with the only slight decrease in API crude inventories not affecting the price. WTI looks to be breaking down from $94.50 Fibonacci support, despite data today due to show a 1.75M barrel decrease in DOE inventories. Further support comes $94.05, $93.50 and $92.65, with resistance at the former support levels of $95.65 and $96.05.

BENCHMARK CURRENCY RATES - DAILY GAINERS AND LOSERS

MARKETS SUMMARY