ECB Explains OMT, Jojima Speaks in Tokyo

Forex News and Events:

The ECB published its monthly report at 08:00 GMT today. The 17-nation central bank’s bulletin was focused on the Outright Monetary Transactions announced by Draghi and which he described as operational earlier this week. The Bank confirmed that the new bond purchasing program is legal according to its underlying rules as it helps achieve the primary mandate of price stability. The report also reiterated Draghi’s reassurances that the bank will “under no circumstances” turn on its printing capacity as it would be breaching Article 123 of its founding treaty which prohibits the bank from monetizing government debt. The Bank had recently been heavily criticized by the Bundesbank’s President Jens Weidmann who said the bond plan compromises the ECB’s independence and aside from increasing balance sheet risk, would violate the rule on financing governments. The ECB said OMTs “are a non-standard but necessary, monetary policy instrument in the current exceptional circumstances in financial markets”. When examining the legality of the program, the ECB stated that the “use of outright purchases of bonds as a monetary policy tool is expressly provided for in Article 18.1 of the Statute” of the European System of Central Banks. However, the ECB stressed that it will only purchase sovereign bonds if governments adhere to strict conditionality. This is an echo of Draghi’s speech this week when he said the program is unlimited, not unconditional. The report concedes that the main risk to the OMTs “has been the need to ensure that this monetary policy instrument could not ultimately weaken fiscal discipline”. Elsewhere, newly appointed Japanese Finance Minister Jojima, who has kept to himself since the Cabinet was formed last week gave a speech today in Tokyo. The Minister said he will be working to achieve the stability of the financial system and emphasized on the need for both growth and fiscal reconstruction. According to Jojima, Japan’s fiscal position is very difficult and fiscal consolidation cannot be postponed. Jojima also spoke with IMF’s head Christine Lagarde who is concerned of the JPY’s strength. He told her that further JPY rise can be expected over a rise in downside risk and insisted that JPY strength does not reflect the state of the economy which is showing signs of exhaustion.

Today's Key Issues (time in GMT):

2012-10-11T00:30:00 AUD AU Employment Change
2012-10-11T00:30:00 AUD AU Unemployment Rate
2012-10-11T06:00:00 EUR GE CPI (YoY)
2012-10-11T08:00:00 EUR EU ECB Monthly Report
2012-10-11T12:30:00 USD US Initial Jobles Claims
2012-10-11T12:30:00 USD US Trade Balance
2012-10-11T12:30:00 CAD CA Trade Balance
2012-10-11T23:50:00 JPY JP Tertiary Industry Activity Index

The Risk Today:

EURUSD EURUSD tumbled to a low of 1.2854 yesterday afternoon and again this morning, before recovering modestly to 1.2870. The overall mood remains bearish however, so we expect the downside to still be vulnerable as S&P ratings agency Spanish downgrade only highlight the lingering problems in Europe. The 200d MA at 1.2824 has been able to hold off recent bearish assaults, but a break would trigger extended weakness to critical support at 1.2754. That said there's no real resistance till 1.2916. Next levels of support located at 1.2808/24 (1st Oct low & 200d MA), 1.2754 (10th & 11th Sept low), 1.2507 (100d MA), 1.2463 (31st Aug low), 1.2386 (14th & 17th Aug high), 1.2241 (10th Aug low), 1.2160 (13th July low), 1.2046 (25th July low), 1.2000 (psychological support) then 1.1870 (7th June low). The first level of resistance are located at 1.2885 (intraday high), 1.2990 (intraday high), 1.3088 (19th Sept high), and 1.3283 (1st May high).

GBPUSD Yesterday, GBPUSD drifted lower to within a few pips of the 1.5979 support level, but thus far the bears have not gathered enough momentum for a break lower (towards 1.5819 target). That said, momentum indicators have shifted downwards indicating this further selling pressure should be expected. The support zone is located at 1.5979 (9th Oct low), 1.5920/40 (18d MA & uptrend), 1.5745/53 (30th July pivot & 100d MA), 1.5665 (uptrend channel floor), 1.5564 (8th Aug low), 1.5656 (intraday low),1.5458 (26th July low), 1.5405 (8th June low), 1.5390 (6th June low), then 1.5266 (13th Jan low). Above 1.6067, watch for next resistance to come into play at 1.6143 (downtrend top, 20th April & 11th May high), 1.6236 (30th April high) and 1.6454 (29th Aug ’11 top).

USDJPY USDJPY selling pressure resumed marginally as we had anticipated, solidifying the formation of a symmetrical triangle . We view this pattern as more likely a downward trend continuation rather than a reversal signal. A clean break of triangle floor (77.75) should triggered an extension sell-off to 76.03.
The next bids can be found at 77.75 (Symmetrical triangle floor), 77.12 (13th Feb low) then 76.03 (3rd & 17th Jan low). Should USDJPY reverse its downward tendency, it will be offered at 79.00 (downtrend top & double top), 79.67 (20th Aug high), 80.11 (reversal), 80.62 (2nd May high), 81.60 (failed corrective rally), 82.56 (6th April high), 82.99 (3rd April high), trigger resistance at 83.40. Should USDJPY reverse its downward tendency, it will be offered at 79.00 (downtrend top & double top), 79.67 (20th Aug high), 80.11 (reversal), 80.62 (2nd May high), 81.60 (failed corrective rally), 82.56 (6th April high), 82.99 (3rd April high), trigger resistance at 83.40.

USDCHF The USDCHF rally on the back of reports that banks would apply negative interest rates to CHF deposits hit a high of 0.9432, but demand has eased marginally today. The move briefly violated critical resistance at 0.9421 which has been damaged but held twice prior. In addition the move broke reigning downtrend channel top. With momentum indicators indictor further bullishness a close above 0.9421 should triggered a bullish extension to 0.9470. The next levels of resistance are located at 0.9580 (7th Sept high), 0.9661 (22nd Aug high), 0.9810 (10th Aug high & uptrend channel), 0.9900 (2nd Aug high), 1.0000 (psychological resistance), 1.0070 (1st Dec 11’ pivot high), 1.0149 (2010 pivot), then 1.0294 (10th Sept 10’ high). The first levels of support should be located at 0.9355/69 (Fibo lvl & 21st May Support), then 0.9194 (7th & 11th May low) and 0.9300 (11th May high).

Resistance and Support: