Market Briefs
• Fed says continuing program to extend Operation Twist through end of year, No new QE, No change to late 2014 exceptionally low rates language
• Fed 2012 Forecasts: Real GDP revised to 1.9%-2.4% from 2.4%-2.9%, Unemployment revised to 8.0%-8.2% from 7.8%-8.0%, PCE Price Index 1.2%-1.7% from 1.9%-2.0%, Core PCE 1.7%-2.0% from 1.8%-2.0%
• Germany’s Merkel: EFSF, ESM do include possibility for buying bonds on secondary market, but not now in discussion
• Greek conservative leader Samaras sworn in as PM
• Canada Q1 job vacancy rate 1.8% vs. 1.6%
• Mexico Apr Retail Sales +2.5% y/y vs. f/c 2.8% and prior 4.3%
• BOE’s Broadbent: Case for monetary stimulus has increased; Inflation outlook improved; Reaction to new schemes good; Decides month by month on QE
• Bernanke: Prepared to take further steps if necessary; Would consider additional asset purchases if economy needed further support
EUR/USD Monday's high at 1.2748, a 38.2% retrace of 2012's trading range, saw another failure there today as the wind was sucked out of the CB easing bid. Those expecting something more than an extension of the Twist from the Fed were disappointed. Judging by the collapse in commodities and rebound in the dollar after the dour Fed Statement, Econ f/c and Bernanke presser that weren't linked to any outright QE by said Fed, quite a few were betting on QE3. There was early EUR buying on the formation of a relatively stable Greek govt and lingering rumors of ESM/EFSF being used to buy govies in the secondary market. But the Greek's have their work cut out, while Merkel's nod that EFSF & ESM are technically capable of being used for secondary bond buys also came with the caveat that such buying had "conditionality" attached to it. In short, she still wants fiscal oversight/sovereignty ceding to sign off on debt collectivization. ECB's Coeure chimed in afterward with talk of rate cut discussions and LTRO being better than SMP, with the former only needed in general liquidity challenges, not localized ones. EZ PMI is out Thur.
USD/JPY The BOJ made it clear overnight that all monetary tools remains on the table, nothing is ruled out. This is no hollow threat in the face of today's miserable Japanese Trade data. It posted its first ever deficit with the EU. The big problem is surging Japanese imports, up 9.3% y/y to May vs +3.3% expected and +8.1% last. Tokyo has decided to restart two nuclear reactors to help fill the power gap into the summer and also to reduce need for imported fuel. USD/JPY was bid from the start in NY, first running stops above 79.15, then above 79.31 (Mon's high and the 10-DMA). A final flurry of buying came on the FOMC's Twist extension and absence of near-term QE threats, at least in the initial statement. Offers by the Jun high at 79.75-80 capped with help from considerably weaker Fed GDP and Employment f/c, as well as Bernanke noting that the Fed has done a tremendous amount to support growth and asset prices already, but could do more if it had to. EUR/JPY took out the 100.90 prior highs and 101 defenses before hitting the upper 21-d Bolli by the 101.42 highs. 101.63 Fibo is next. Down TL from Apr is now support at 99.97.
GBP/USD An unexpected rise in the UK claimant count (+8.1k vs. -12.8k, -3k expected) and news from the MPC meeting minutes that Gov. King shifted to an easing stance weighed on sterling through the day. There was a big spike in EUR/GBP up toward 0.8100 initially that was quickly reversed, but the cross still sloped upward the rest of the day. GBP/USD likewise dropped and recovered to eventually break Tuesday’s high on dollar selling. That turned in the US morning and saw cable fall through 1.5700 in the afternoon, with some FOMC volatility along the way. In the context of what looks to be a consolidation for GBP/USD based on falling Trend Intensity and narrowing Bollinger Bands, it is worth noting the test today of both the upper Band and the 50% retracement of the Apr-Jun decline (approx. 1.5785). That creates an easy expectation for a range reversal back toward the little consolidation around 1.5500 we saw a short while back.
USD/CHF Swiss ZEW for Jun at -43.4 vs -4 last was far gloomier than the German one released Tuesday at -16.9 vs 10.8 last, perhaps as the outsized banking sector in the Alpine economy suffered greater anxiety regarding the eurozone threats that surround it. Of course, like Germany, Swiss interest rates toward the front of the curve have been bid into negative territory on safe-haven flows from the periphery. This cheap money, reinforced by the SNB's 1.2000 EUR/CHF floor, has added to a housing bubble in Switzerland, creating some risks to local lenders. The SNB has chided one local bank to increase its capital base as a result of this risk and the broader threat from its European trading partners. Germany is the biggest of those, thus shielding Swiss exporters from the worst of the region's malaise, but even the core has struggling with growth lately. EUR/USD floored, USD/CHF trading is merely the inverse of EUR/USD; the latter's recovery being rejected twice this week by the 38.2% retracement near 1.2745 (0.9423 the rough USD/CHF equivalent support). Fed's twist not enough to break that support. Swiss Trade out Thur.
USD/CAD started the NY session near its lows for the day as traders anticipated additional easing measures from the FOMC today. As the day progressed S-T profit taking ahead of the announcement brought the pair back up to old support in the 1.0195/1.0205 region. After the initially Fed announcement the pair spiked higher to test resting offers in the 1.0230/40 region, an area that coincides with T-L resistance (1.0241) off the June 4th high. Also aiding in capping the rally at the highs is the 10 DMA (1.0247) that has done a good job of capping rallies in this latest move down. Merkel’s comments about potential buying of secondary bonds via the EFSF & ESM gave risk a rally and took USD/CAD back towards the lows. Bernanke’s press conference seemed to hint that the Fed would rather see some action on the fiscal side to help the economy before the Fed does any additional easing took some of the shine off the risk rally but the pair has managed to remain closer o the lows of the day. The technical outlook remains negative for the pair. The daily RSI remains below 50 and the 21 day Bolli bands are widening again. Numerous rejections of the trend line off the June highs combined with the 10 DMA capping rallies bolsters the case for additional moves lower.
AUD/USD opened the NY session trading near the highs of the O/N session as the risk-on theme built up ahead of today’s FOMC meeting carried over. Marginal new highs were made c. 1.0210 but resting offers ahead of 1.0220/25 and the lows from April capped the rally. Trading quieted down until the afternoon when the Fed announced Operation Twist will be extended to the end of this year but no new QE would be involved. The knee jerk reaction was to sell off risk and AUD/USD followed suit. The pair quickly dropped to interim support c. 1.0130/35 before recovering. Comments from Germany’s Merkel regarding the possibility of the EFSF & ESM buying bonds in the secondary mkt gave risk a lift once again and AUD/USD went on to make new highs c. 1.0225. Merkel’s comment also stated that discussions on secondary purchases were not in discussion right now while also stating that the buying entails conditionality and is purely theoretical. That took some of the shine off the risk rally. Fed economic projections downgraded US GDP and employment forecasts for 2012 & 2013 and turned sentiment south again. Bernanke’s presser added more weight to risk as it appears he wants more action fiscally before the Fed make more accommodations. Risk and AUD/USD sold off more to trade back below 1.0170/75. Technically we may see the first signs the rally is stalling. Daily RSI and Stochastic studies are turning down from O/B territory while the April low (1.0226) and the 200 DMA (1.0250) cap the rally for now.
NZD/USD News of a new Greek government helped the market’s overall risk tone during the early US morning during which time the kiwi went bid. That saw NZD/USD revisit Tuesday’s highs (though not break them) and AUD/NZD move down to the 1.2780 area again. The currency started losing ground later in the US morning, though, and although there was volatility from the FOMC statement near midday, that continued through the US afternoon. NZD/USD ended up breaking its prior lows and moving into Monday’s range as a result. AUD/NZD, meanwhile, move back up to prior highs, though did show weakness in the latter part of the day again. We're still seeing uptrend indications for NZD/USD as Trend Intensity has turned north again. The issue is proximity to the March low near 0.8050 which we expect to be resistance. RSI reached near to overbought, but never quite got there, so the might yet be a kick up to test those prior lows. We are due to get Q1 GDP figures from NZ on Thursday, with the market expected an uptick to 0.5% from 0.3%, which may factor in to proceedings.
LATAM The day’s feature event was the policy decision put forth by the FOMC at midday, but while the announcement of extended Operation Twist and no new QE created volatility, it didn’t really net out to change the markets much. The markets just continued moves that had already been unfolding, likely in anticipation of what we got from the Fed. That generally meant a stronger dollar. USD/BRL is representative. It started the day with new lows below 2.025, rallied to 2.035 before the FOMC statement, fell back to the prior lows, then rallied to new highs. Mexico reported a strong April retail sales reading of 0.9%. The market was looking for 0.6% as compared to the -0.43% posted in the prior month. USD/MXN followed the same course as 13.65 early lows gave way to 13.75 area highs pre-Fed. There was a new low on the news, and no new highs to follow, though.
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