Draghi gives further clues on bond buys plan
The focus remains on Europe where European Central Bank President Mario Draghi said that purchases of sovereign bonds with a maturity of up to 3-years could will not be considered as state aid and would not breach the central bank mandate, Reuters reported Monday citing a number of European lawmakers. Yields on 2y Italian, Spanish, and Portuguese debt each fell over 10 bp in response.
As Gareth Berry, FX strategist at UBS, notes: “It's worth noting that, although Draghi referred to the possibility of buying out to three-years, other options are still on the table. He spoke of buying bonds with maturities "of up to one year, two years, or even three years", so clearly the details are yet to be decided. Nonethless, Draghi still leaves plenty room for interpretation.”
However, the desire to avoid accusations of monetary financing, according to Mr. Berry, “will likely impose some upper limit on which maturities are declared eligible, as will the need to circumvent issues around the ECB's seniority.” Until the question of seniority is addressed, UBS strategist suspects “private-sector bondholders are unlikely to see the ECB as a partner in the bond markets, and this issue ultimately limits how euro-positive the bond buying program can be.”
Moody's puts the EU on negative outlook; maintains AA for now
Ratings agency Moody's announced during the early going of the Asian session it had downgraded the outlook to negative on the European Union, while maintaining the AAA rating still intact for now. According to Moody's: "Change to negative reflects negatives outlook to AAA sovereign rating of key contributors to EU budget like Germany, France, UK and Netherlands.” Outlook may be back to stable if key contributor countries are back to stable, Moody's added.
RBA shows some dovish elements; Aussie recovers some ground
The Australian dollar gained a mild bullish tone late in Asia, after the RBA surprised no one leaving rates on hold at 3.50 per cent. The language used was not as dovish as the market had feared following the collapse of iron ore prices and China notable slowdown, ergo, some Aussie shorts were caught on the wrong-footed, with AUD/USD price rising above 1.0250.
"The statement still not showing firm signal of an intent to cut again, though the statement does contain dovish elements" said Australian economist Adam Carr on his twitter account.
Earlier on the session, the Aussie had retained its recent bearish tone, making new weekly lows after Fortescue, Australia's third largest miner, announced it had decided to cut staff, production guidance and investment plans.
As reported by ABC News: “Fortescue Metals is delaying $US1.6 billion in expansion plans and cutting jobs, citing the recent slump in iron ore prices. Australia's third biggest iron ore producer has cut its near term expansion target from 155 million tonnes of iron ore per year to 115 million tonnes."
In a side note, Australia saw the current account balance print a -11,801M in 2Q vs -14,892M in 1Q. Expectations were for -12.2 bln approximately. The contribution from Aus net exports rose to 0.3%, below a 0.55% estimates.
Hot FX pairs to follow today – Aussie and Euro
From a technical perspective, Sean Lee, Founder at FXWW, notes “AUD/USD bids are reported from the interbank market between 1.0220/30 and there is solid technical support around 1.0215/20 (see chart) which is both a 38.2% retracement (.9585/1.0620) and a 61.8% retracement (.9965/1.0620). Sell orders reported starting at 1.0280 so we should be in for another range trading session pre-RBA.”
The EUR/USD, which was captured in a narrow 40 pips range on US thin holiday-mode markets, saw another spike in Asia following yesterday's 1.2610 high, resulting on the spot rate to trade at a new week high just 10 pips shy of last Friday's post Jackson Hole peak at 1.2636. Draghi comments to EU lawmakers, mentioned above, got leaked, leading to the recent bullish price action.
As Valeria Bednarik, Chief Analyst at Fxstreet.com, notes: “The EUR/USD hourly chart shows price moving in a very tight range hourly basis, leaving technical indicators flat yet in positive territory. As updated earlier the 4 hours chart holds also a positive tone as long as short term above the 1.2550 mark; however, a clear break the 1.2630 area, past January low and daily highs and lows congestion zone, to confirm a clearer development of the upward dominant trend.”
US data is the focus on the day ahead
For the day ahead in Europe, the calendar shows no real market-moving events. In the UK, the PMI construction index will be publshed at 8.30GMT, which may whipsaw the GBP/USD either way some 10 up to 30 pips depending on the divergence from the official estimate. EU Producer price index comes next just 30 minute later, however, with the market focus away from inflationary threats in Europe, unlikely the event will offer much move in the Euro. Any notable swing will most likely come on a headline by headline basis and/or on large institutions buying/selling campaigns, aka liquidity runs.
US data will be more interesting, with the focus of the day ahead eyed at two versions of the same indicator. One is the Institute of Supply Management (ISM) , “ commonly referred to as the ‘ISM’ and is one of the most widely watched indicators of the US economy” notes Adrian Foster, Asian Research Analyst at Rabobanl. The second indicator is the Markit Manufacturing PMI, which as Adrian explains, “since May 2012 has produced this new indicator, with the name’s not quite as catchy but it’s a useful addition to the data offerings from the US.”