ECB extends QE but trims asset purchase

Forex News and Events

Central banks in focus (by Arnaud Masset)

First the ECB…

The US dollar was the big winner yesterday amid the ECB decision to extend its quantitative easing programme as it surged on a broad basis with the dollar index gaining 1.40% up to 101.20, while the single currency . The European central bank announced an extension of its QE by nine months until December 2017 but trimmed the monthly purchase target to €60bn per month from €80bn. In addition, Mario Draghi eased the buying rules, allowing the purchase of bonds yielding below -0.4% - the current ECB’s deposit rate - and extending the maturity range for eligible securities. Together, all those measures may be seen as the beginning of tapering; however we believe the ECB is more concerned about potential liquidity issues, which would explain the lowering of the size of the QE. But to mitigate the negative impact this QE reduction would have had on the market, he announced the two latter measures, preventing a sharp EUR appreciation, and argued that it was mostly due to the fact that deflationary risk had largely disappeared. EUR/USD fell 2% to 1.0610 after the announced and has been trading trendless around that level since then.

… Then the Fed

The December meeting of the Federal Reserve has been long awaited as it was seen as the only opportunity for an interest rate hike. The Fed has therefore done the job and prepared the market for this move. We believe that the upcoming tightening move is fully priced in, meaning that the Fed could only disappoint should Janet Yellen send some dovish signals at the press conference that follows the rate decision. The “Trump effect” is also slowly fading as market participants realised it will take months, if not years, for the upcoming US president to give life to its campaign promise. All in all we believe that the dollar rally is coming to an end as downside correction is becoming more and more likely. Be ready for dollar weakness as we start 2017.

SNB reaction to ECB meeting (by Yann Quelenn)

The European Central Bank has finally decided to lower its pace of purchases after April to €60 billion and buy bonds with rates below the depo floor of -0.4%. This outcome was essential as bond scarcity is making the pursuit of the QE program increasingly difficult.

Following the ECB rates decision and press conference, the Swiss franc appreciated again and the pair is now back below 1.08. The war on devaluation rages on with upside pressure on the Helvetic currency becoming increasingly difficult to sustain in our view. Swiss total sight deposits have increased sharply over the last month following President-elect Trump’s election, which would suggest a strong intervention from the SNB. Monday’s release of sight deposits should confirm this view.

Also the SNB’s next meeting is due to be held next Thursday and we believe that there is still some room for further negative interest rates as mentioned by Andreas Maechler some weeks ago: "Loose monetary policy has not reached the limit of its effectiveness. […]. We believe the benefit of the negative interest rate still far outweighs the costs”.

EUR/GBP - Lack Of Follow-Through.

 

Today's Key Issues	Country/GMT
Oct Current Account (Seasonally Adjusted), last 11.9b, rev 13.5b	DKK/08:00
Oct Trade Balance ex Ships, last 5.6b, rev 5.3b	DKK/08:00
Dec 2 Money Supply Narrow Def, last 8.53t	RUB/08:00
3Q Current Account as a % GDP, exp -3,60%, last -3,10%, rev -2,90%	ZAR/08:00
3Q Current Account Balance, exp -148b, last -134b, rev -123b	ZAR/08:00
ECB's Smets Speaks at Banking Conference in Brussels	EUR/08:00
Oct Visible Trade Balance GBP/Mn, exp -£11800, last -£12698, rev -£13832	GBP/09:30
Oct Trade Balance Non EU GBP/Mn, exp -£3450, last -£3969, rev -£5268	GBP/09:30
Oct Trade Balance, exp -£4300, last -£5221, rev -£5812	GBP/09:30
Oct Construction Output SA MoM, exp 0,20%, last 0,30%, rev 0,90%	GBP/09:30
Oct Construction Output SA YoY, exp -0,10%, last 0,20%, rev 2,50%	GBP/09:30
Nov BoE/TNS Inflation Next 12 Mths, last 2,20%	GBP/09:30
ECB's Knot Speaks in Maastricht	EUR/09:45
Dec IGP-M Inflation 1st Preview, exp 0,07%, last -0,11%	BRL/10:00
Nov IBGE Inflation IPCA MoM, exp 0,27%, last 0,26%	BRL/11:00
Nov IBGE Inflation IPCA YoY, exp 7,08%, last 7,87%	BRL/11:00
Oct Industrial Production YoY, exp 1,00%, last 0,70%	INR/12:00
ECB's Ilmars Rimsevics speaks in press conference	EUR/12:00
Bloomberg Dec. Canada Economic Survey	CAD/14:00
Oct F Wholesale Inventories MoM, exp -0,40%, last -0,40%	USD/15:00
Oct Wholesale Trade Sales MoM, exp 0,70%, last 0,20%	USD/15:00
Dec P U. of Mich. Sentiment, exp 94,5, last 93,8	USD/15:00
Dec P U. of Mich. Current Conditions, exp 107,5, last 107,3	USD/15:00
Dec P U. of Mich. Expectations, exp 86, last 85,2	USD/15:00
Dec P U. of Mich. 1 Yr Inflation, last 2,40%	USD/15:00
Dec P U. of Mich. 5-10 Yr Inflation, last 2,60%	USD/15:00
ECB's Coeure speaks in Paris	EUR/15:15
ECB's Smets Gives NBB Forecasts in Brussels	EUR/16:00
Nov Foreign Direct Investment YoY CNY, exp 2,00%	CNY/23:00
ABPO Nov. Cardboard Sales	BRL/23:00
3Q BoP Current Account Balance, exp -$2.50b, last -$0.30b	INR/23:00
Nov Trade Balance, exp -$10350.0m, last -$10160.0m, rev -$10160.8m	INR/23:00
Nov Imports YoY, last 8,10%	INR/23:00
Nov Exports YoY, last 9,60%	INR/23:00

 

The Risk Today

Yann Quelenn

EUR/USD's weakness is back. Hourly resistance is given at 1.0874 (08/12/2016 high). Support can be found at 1.0506 (05/12/2016 low). Bearish pressures seem to increase around 1.0800. Expected to show further weakness around that level. In the longer term, the death cross indicates a further bearish bias despite the pair has increased since last December. Key resistance holds at 1.1714 (24/08/2015 high). Strong support given at 1.0458 (16/03/2015 low) is on target.

GBP/USD is bouncing back from hourly resistance at 1.2771 (05/10/2016 high). Hourly support is given at 1.2302 (18/11/2016 low). Expected to show renewed pressures towards resistance at 1.2771. The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.

USD/JPY is trading sideways. The pair is monitoring resistance given at 114.83 (16/02/2016 high). Hourly support can be found at 112.88 (05/12/2016 low). Significant support is given around 111.36 (28/11/2016 low). Stronger support lies at 108.56 (17/11/2016 low). Expected to see renewed short-term bullish pressures. We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).

USD/CHF is trading mixed. Key support is given at the parity. Hourly resistance lies at 1.0205 (30/11/2016 high). The road is wide-open for renewed weakness. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.

 

Resistance and Support:

EURUSD	GBPUSD	USDCHF	USDJPY
1.1366	1.3481	1.1731	125.86
1.13	1.3121	1.0328	121.69
1.0954	1.2775	1.0257	114.87
1.0624	1.2618	1.0157	114.42
1.0506	1.2302	0.9929	112.88
1.0458	1.2083	0.9632	111.36
1	1.1841	0.9522	109.8