|
Markets connecting the dots; QE to infinity, EUR/USD to... ?
FXstreet.com (Barcelona) - Traders are finally starting to connect the dots to develop meaningful risk swing in the FX market. After a tough slog for investors in recent months, with whipsaws and undefined trends all over the FX map, yesterday, Ben Bernanke and his troop at the Fed, provided the last loose end, the latest and biggest argument in favour of a pro-risk push, as the anticipated announcement of more easing policies finally came true.
Bernanke shows wild-card: For now, $40 billion/month in MBS
The FOMC announced an open-ended program, which Bart Melek, TDS research analyst, explains, “will be designed to help lift economic growth to levels which will generate robust employment growth.” The new QE3 version will target the mortgage backed securities market (MBS), with a monthly commitment to buy over $40 billion worth on the long end of the curve per month. “No new Treasury purchases announced the current program known as Operation Twist has been left in tact” Mr. Melek adds.
The Fed was explicit that in order to end the purchases, a substantial improvement in the jobs market should be seen. From Danske Bank senior analyst Signe Roed-Frederiksen: "It is up for interpretation what a substantial improvement means, but guidance is found in the other key sentence that monetary policy will stay highly accommodative for a considerable time after the economic recovery strengthens. This suggests that the Fed will not tighten policy before unemployment has moved substantially closer to its 'natural' level”, thought to be around 7%."
USD with bruises all over; Doesn't look like the slaughter is over
The U.S. dollar fell sharply across all asset classes, with EUR/USD finding buyers all the way from pre-QE3 announcement dip at 1.2856 to currently be heading into Europe with stops above 1.30 having been tripped. AUD/USD was not different, bursting thru its last NY highs to now set its new upside target at 1.0615. Even more vigorous was the Kiwi reaction, marching up like a champ towards next target at 0.8400. USD/JPY also saw wild swings, hitting a 7-month low at 77.13 before buyers stepped in. The GBP underperformed vs EUR and AUD and interbank reports, according to Sean Lee, Founder at FXWW, "suggest that this is flow related, with heavy offers at 1.6150, 1.6175 and 1.6200 slowing down bullish progress."
EUR/USD 1.30 stops tripped; fortifies bullish outlook
During a lively Asian session, solid sell orders reported between 1.3020/30, including offers from Asian Central Banks, hardly provided much resistance, with MacroFX players seen entering EUR/USD longs in earnest. “ Many of the big macro funds will only initiate trades after the NY close so there is always the possibility of some movement after big events like the FOMC" notes Sean Lee.
The fact that the EUR/USD has been hovering around psychological 1.3000 level without any retracement of notice suggests sellers still find no value on challenging the current bullish momentum, which according to Valeria Bednarik, in-house chief analyst, will likely persist now that the pair has firmed up after a clear Asian break above the 1.30 big figure. “The break may see the pair extending towards 1.3070 later on the day.”
Just 10 pips ahead of Valeria's target, we will have the 55-day MA crossing, points John Noonan, analyst at IFR Markets, who suggest “break above 1.3060 targets 38.2 fibo of 1.4940/1.2042 move at 1.3150.”
Potential moves beyond Noonan's upside target were given by Fan Yang, technical analyst at FXTimes, who by approaching the the current momentum from a broader view, notes that the break above 1.30 will set the next key resistance at pivot near 1.3270, which is likely near a key declining trendline seen in the weekly chart.”
Any meaningful retracement is widely seen as a buying opportunities as per latest tech reports from prominent analysts. From Valeria: “I will be happy to jump in on pullbacks towards 1.2930 area, now strong support as per being the 61.8% retrac of this year slide. The 20 SMA in the mentioned time frame stands around 1.2860 now, and will also provide interesting buying opportunities on slides if reached.”
Does QE3-induced risk-on runs have legs to extend?
There is a controversial argument presented by Kathy Lien, Founder at BKAssetManagement, who notes quantitative easing may not be so bad for the dollar. She looks at how the Greenback performed vs the euro and Japanese Yen in the days, weeks and months that followed QE1 and QE2.
From Kathy: “When the central bank took the monumental step of announcing the first round of QE on November 25, 2000, the EUR/USD and USD/JPY rallied. The next day however, the dollar recovered and rallied for 4 straight trading days before collapsing hard against the euro. USD/JPY on the other hand took a longer time to recover. The currency pair lost 1000 pips in the 3 weeks that followed (falling from 97.40 to 87.20) before stabilizing and recovering all of those losses. By March or April of that year, USDJPY was trading higher but as we know now, the gains did not last.”
John Noonan tends to mostly agree with Kathy's view: “Equities & high yielding FX like the AUD may be basking in the afterglow after the Fed set the stage for QE3 but the gains may be shortlived. Past QEs have shown that credit & equities have benefited though rallies have gotten progressively shorter. Moreover, underlying global macro has only worsened, chances are high that EZ govts may disappoint & Chinese growth slows sharply. That scenario would be similar to 2007-08 when markets rallied in-spite of weak fundamentals presenting a huge shorting opportunity at some point.”
Eurogroup meeting; Watch for headlines on Spain rescue prospects
Euro leaders will start informal meetings in Nicosia today, with Spanish president Mariano Rajoy expected to get pressure from peers as to when the country is expected to request an anticipated full-blown bailout, a pre-move required for the ECB to commence the purchase of Spanish bonds if market confidence were to deteriorate again.
At this point, however, Spain's European partners already sense that in Cyprus, chances are that the Government, despite the pressure to ask the rescue, will receive one of Rajoy's favourite lines: "Let's wait a little longer."
In the agenda of the Eurogroup for today, Greece will also be in the limelight, with the troika (ECB, Commission and IMF) in Athens for the usual damage count, and Cyprus, the host country, in the process of obtaining a complete rescue. At day's end, however, the key will be the verdict from Berlin over Spain.
Bernanke shows wild-card: For now, $40 billion/month in MBS
The FOMC announced an open-ended program, which Bart Melek, TDS research analyst, explains, “will be designed to help lift economic growth to levels which will generate robust employment growth.” The new QE3 version will target the mortgage backed securities market (MBS), with a monthly commitment to buy over $40 billion worth on the long end of the curve per month. “No new Treasury purchases announced the current program known as Operation Twist has been left in tact” Mr. Melek adds.
The Fed was explicit that in order to end the purchases, a substantial improvement in the jobs market should be seen. From Danske Bank senior analyst Signe Roed-Frederiksen: "It is up for interpretation what a substantial improvement means, but guidance is found in the other key sentence that monetary policy will stay highly accommodative for a considerable time after the economic recovery strengthens. This suggests that the Fed will not tighten policy before unemployment has moved substantially closer to its 'natural' level”, thought to be around 7%."
USD with bruises all over; Doesn't look like the slaughter is over
The U.S. dollar fell sharply across all asset classes, with EUR/USD finding buyers all the way from pre-QE3 announcement dip at 1.2856 to currently be heading into Europe with stops above 1.30 having been tripped. AUD/USD was not different, bursting thru its last NY highs to now set its new upside target at 1.0615. Even more vigorous was the Kiwi reaction, marching up like a champ towards next target at 0.8400. USD/JPY also saw wild swings, hitting a 7-month low at 77.13 before buyers stepped in. The GBP underperformed vs EUR and AUD and interbank reports, according to Sean Lee, Founder at FXWW, "suggest that this is flow related, with heavy offers at 1.6150, 1.6175 and 1.6200 slowing down bullish progress."
EUR/USD 1.30 stops tripped; fortifies bullish outlook
During a lively Asian session, solid sell orders reported between 1.3020/30, including offers from Asian Central Banks, hardly provided much resistance, with MacroFX players seen entering EUR/USD longs in earnest. “ Many of the big macro funds will only initiate trades after the NY close so there is always the possibility of some movement after big events like the FOMC" notes Sean Lee.
The fact that the EUR/USD has been hovering around psychological 1.3000 level without any retracement of notice suggests sellers still find no value on challenging the current bullish momentum, which according to Valeria Bednarik, in-house chief analyst, will likely persist now that the pair has firmed up after a clear Asian break above the 1.30 big figure. “The break may see the pair extending towards 1.3070 later on the day.”
Just 10 pips ahead of Valeria's target, we will have the 55-day MA crossing, points John Noonan, analyst at IFR Markets, who suggest “break above 1.3060 targets 38.2 fibo of 1.4940/1.2042 move at 1.3150.”
Potential moves beyond Noonan's upside target were given by Fan Yang, technical analyst at FXTimes, who by approaching the the current momentum from a broader view, notes that the break above 1.30 will set the next key resistance at pivot near 1.3270, which is likely near a key declining trendline seen in the weekly chart.”
Any meaningful retracement is widely seen as a buying opportunities as per latest tech reports from prominent analysts. From Valeria: “I will be happy to jump in on pullbacks towards 1.2930 area, now strong support as per being the 61.8% retrac of this year slide. The 20 SMA in the mentioned time frame stands around 1.2860 now, and will also provide interesting buying opportunities on slides if reached.”
Does QE3-induced risk-on runs have legs to extend?
There is a controversial argument presented by Kathy Lien, Founder at BKAssetManagement, who notes quantitative easing may not be so bad for the dollar. She looks at how the Greenback performed vs the euro and Japanese Yen in the days, weeks and months that followed QE1 and QE2.
From Kathy: “When the central bank took the monumental step of announcing the first round of QE on November 25, 2000, the EUR/USD and USD/JPY rallied. The next day however, the dollar recovered and rallied for 4 straight trading days before collapsing hard against the euro. USD/JPY on the other hand took a longer time to recover. The currency pair lost 1000 pips in the 3 weeks that followed (falling from 97.40 to 87.20) before stabilizing and recovering all of those losses. By March or April of that year, USDJPY was trading higher but as we know now, the gains did not last.”
John Noonan tends to mostly agree with Kathy's view: “Equities & high yielding FX like the AUD may be basking in the afterglow after the Fed set the stage for QE3 but the gains may be shortlived. Past QEs have shown that credit & equities have benefited though rallies have gotten progressively shorter. Moreover, underlying global macro has only worsened, chances are high that EZ govts may disappoint & Chinese growth slows sharply. That scenario would be similar to 2007-08 when markets rallied in-spite of weak fundamentals presenting a huge shorting opportunity at some point.”
Eurogroup meeting; Watch for headlines on Spain rescue prospects
Euro leaders will start informal meetings in Nicosia today, with Spanish president Mariano Rajoy expected to get pressure from peers as to when the country is expected to request an anticipated full-blown bailout, a pre-move required for the ECB to commence the purchase of Spanish bonds if market confidence were to deteriorate again.
At this point, however, Spain's European partners already sense that in Cyprus, chances are that the Government, despite the pressure to ask the rescue, will receive one of Rajoy's favourite lines: "Let's wait a little longer."
In the agenda of the Eurogroup for today, Greece will also be in the limelight, with the troika (ECB, Commission and IMF) in Athens for the usual damage count, and Cyprus, the host country, in the process of obtaining a complete rescue. At day's end, however, the key will be the verdict from Berlin over Spain.
Author
FXStreet Team
FXStreet
More from FXStreet Team
