Good morning and welcome back to all who were off for Labor Day yesterday,
The Reserve Bank of Australia has left their interest rates unchanged at 3.5% overnight, giving some support to the AUD has finally shown some buying interest after a few days of being sold. The RBA stated that despite the overall worsening global conditions that have continued recently, monetary policy is consistent with the inflation levels set. Analysts were unanimous in their anticipation there would be no move by the RBA, and the currency is looking to test highs. Resistance now lies at 1.0285 and 1.0310, while support remains at 1.0225 and 1.0210.
Guest post by Matthew Lifson, Foreign Exchange Trader, Market Analyst of Cambridge Mercantile Group.
The EUR begins the shortened trading week higher as traders are looking at the “risk on” currencies in a positive light. Traders are buying EUR in anticipation that the ECB will announce on Thursday that the have everything in place to launch a new bond buying program. ECB President Mario Draghi has added to that with comments stating that purchases of sovereign bonds with a maturity of no more than 3 years would not be considered to be breaking EU rules. According to Draghi who was speaking in a closed hearing of the Economic and Monetary Affairs Committee of the European Parliament bonds with maturities of up to 3 years will easily expire. He then stated that there would be very little monetary financing effect. Under the Draghi plan, the ECB would buy bonds together with the EFSF and the ESM and this would the pressure of high borrowing costs for Spain and Italy. According to European lawmakers who were contacted on Monday, this would not be a breach of the central bank mandate. After this news was released, the yields on Italian, Spanish and Portuguese debt fell more than 10 bps.
Analysts are warming to this idea and that the ECB will actually have some concrete information to release on Thursday following their meeting. It is expected that any plan will have an upper limit, probably the three year limit placed on maturities that will be considered eligible under this new plan. There is also question of how to get around the ECB seniority question. If the ECB cannot get past the seniority question it could limit the positive EUR feeling regarding the new bond program.
Elsewhere in the Euro world, Moody’s announced that it had downgraded the outlook on the European Union to negative, while it maintained the AAA rating for the time being. The change in the outlook to negative reflects the outlook of the sovereign rating of key EU contributors such as the UK, Germany, France and the Netherlands.
Adding to the “risk on” currencies, CAD has strengthened overnight as the recent rally of crude oil prices has helped the Canadian Dollar. Technically, as long as the USD/CAD remains below .9870, the downside in the currency pair remains intact. The next support area for the USD/CAD is at .9825, while resistance remains at .9870.
Asian equity markets were mostly lower overnight, as are the early European markets. DOW Futures are higher at 5:00 am, indicating a positive start to the US equity markets.
EUR is attempting to keep hold of the 1.2600 level. For the moment it looks bid as traders seem willing to listen to Draghi and see what happens on Thursday. Jackson Hole has come and gone and now the ECB is center-stage. Support for EUR is at 1.2580. We could also be seeing a “buy the rumor, sell the fact”, move in the EUR ahead of the ECB meeting. Let’s see where the US and Canadian traders take the currency later today.