Draghi hints to additional easing in December

Forex News and Events

Speaking today, ECB President Mario Draghi sounded ready to ease further stating, “we will do what we must to raise inflation as quickly as possible”. EURUSD reacted quickly by dropping 40pips to 1.0664. The high conviction verbiage sounded very much like this "whatever it takes" comments which held the EU together in 2012. The rest of the speech was decidedly dovish as risk to price stability were to the downside. we expect December will include expanded asset purchases, cut in deposit rate and verbal intervention. We remain bearish on EURUSD, focused on a retest of March low at 1.0458. Short term recoveries should eb seen as opportunities to reload EURUSD short positions.

Mexico Q3 GDP - Yann Quelenn

Mexican Q3 GDP will be released today. It is expected to come in at 2.4% year-on-year, up from 2.2% Q2 but down from the first quarter which printed at 2.5%. The Mexican peso has strengthened slightly from the last quarter against the greenback. It is currently trading at an average of 16.50 and in our view the USDMXN will head further north.

The major issue is that Mexico is struggling to find investors to exploit its huge oil reserves. Over the past twenty years, the country has not had the ability to invest in its own infrastructures. Therefore, Mexico has been forced to open up its petroleum business to private and foreign investors. Unfortunately the country has been hit by the lingering oil commodity prices. WTI crude oil broke $40 a barrel on Tuesday night before bouncing back. The downside momentum is clearly important.

In addition, the peso has been constantly dropping against the dollar for four years. December's Fed rate expectations increase demand for dollars, As a result we believe that the peso is set to further lower. In the event of December’s fed rate hike not happening this would provide relief for the currency. However, such respite would only be short-lived before expectations for March 2016 began to mount. It is a never ending story for Mexico, which is not only struggling with its own economy but also with the high expectations that markets expect from the first world economy.

Positioning for Fed “lift-off“

Fed Reserve Vice Chairman Stanley Fischer has provided the markets with further verbal support for a rate hike in December. Fischer reiterated that no decision has been made on the precise timing of the first rate hike in ten years, yet stated in the “relatively near future probably some major central banks will begin gradually moving away from near-zero interest rates.” There is a majority of analysts who expect the USD to come under selling-pressure after the first rate hike is delivered. Historically this is what happens. Yet, the recoupling of correlation between USDJPY and short-end US/JP yield spread (highest in G10), suggests that even after the first rate hike, yield seeking participants will continue to bid up USDJPY. While sensitivity between USDJPY and global equity markets performance remains strong, the traditional role of yields will become increasingly significant. While the US yields curve should continue to steepen, Japan rates will remain constricted due to additional BoJ policy.

Last week, the BoJ maintained its current pace of monetary easing despite evidence that the economy has stalled. Given the already massive stimulus program, the BoJ is clearly reluctant to expand unless absolutely necessary. Governor Haruhiko Kuroda tried to paint an optimist picture indicating that tightening labor markets would lift the Japanese economy. In the background the BoJ has slowly shifted how it assesses inflation to a broader range measurement, which in turn has made the BoJ sound less dovish. The rational is to keep strategy flexible and focused more on creating domestic inflation rather than economic adrenaline of imported inflation (via competitive FX devaluations). Domestic prices have shown a significantly more positive outlook indicating that the BoJ’s rush to provide additional stimulus is diminished. That said, Japan’s economic recovery has reversed back into a technical recession. A drastic switch in policy tactic is unlikely until economic data recovers, indicating more BoJ stimulus is coming (January).

The Risk Today

Peter Rosenstreich

EURUSD remains in a downtrend channel. The technical structure is clearly negative. The pair lies above 1.0600. Hourly support is given at 1.0617 (18/11/2015). Hourly resistance can be found at 1.0763 (19/11/2015 high). Stronger resistance stands at 1.0897 (05/11/2015 high). Expected to show consolidation of the pair. In the longer term, the technical structure favours a bearish bias as long as resistance holds. Key resistance is located region at 1.1453 (range high) and 1.1640 (11/11/2005 low) is likely to cap any price appreciation. The current technical deteriorations favours a gradual decline towards the support at 1.0504 (21/03/2003 low).

GBPUSD is increasing for the time being. Hourly support can be found at 1.5027 (06/11/2015 low). Hourly resistance at 1.5294 (19/11/2015 high) has been broken. Stronger resistance can be found at 1.5529 (22/09/2015 high). Expected to show a reversal as the mid-term lower highs suggest a declining trend. The long-term technical pattern is negative and favours a further decline towards the key support at 1.5089 , as long as prices remain below the resistance at 1.5340/64 (04/11/2015 low see also the 200 day moving average). However, the general oversold conditions and the recent pick-up in buying interest pave the way for a rebound.

USDJPY is weakening but remains in the uptrend channel. The short-term technical structure still favours a further rise. Strong support lies at 120.80 (22/10/2015 low). Expected bounce before entering into another upside move. A long-term bullish bias is favored as long as the strong support at 115.57 (16/12/2014 low) holds. A gradual rise towards the major resistance at 135.15 (01/02/2002 high) is favored. A key support can be found at 116.18 (24/08/2015 low).

USDCHF has broken the uptrend channel. Yet, the pair remains around the lower bound of this channel. Hourly support is given at 0.9944 (06/11/2015 low) and resistance at 1.0171 (17/11/2015 high) has been broken. New hourly support lies at 1.0221 (intraday high). Expected to show continued strengthening. In the long-term, the pair has broken resistance at 0.9448 and key resistance at 0.9957 suggesting further uptrend. Key support can be found 0.8986 (30/01/2015 low). As long as these levels hold, a long term bullish bias is favoured.

Resistance and Support: