Is it the end of QE in the US. Financial markets were certainly caught by surprise yesterday afternoon, as the release of the FOMC minutes gave way to speculation that the current policy of open-ended QE3 may be over sooner than anticipated. Equities took a hit on this as did the commodity markets and the USD gained strength in the late North American trading day and this has carried over into the overnight trading session.
According to the January FOMC minutes, during the meeting the members seemed to have more confidence in the US economic outlook. Fueling these feelings were improved business confidence and household consumption.
Apparently there were some “heated” debates regarding the continuation of the asset purchase program. Some members suggested “varying the pace of asset purchases”, while others discussed ending the program entirely before there was substantial improvement in the labor market. You might remember that earlier comments stated that QE3 would remain in effect until the unemployment rate reached 6.5%. It is currently hovering in the 7.7-7.8% level.
Needless to say traders await some clarification and will hopefully get that when Chairman Bernanke speaks next week. Until then, the path of the USD looks to be on the upswing at the moment.
As for the currencies, the biggest mover has been the EUR. “Long” EUR positions seemed to be quickly liquidated yesterday afternoon as the EUR tripped support levels triggering “stop loss” selling. Adding to the EUR’s woes were economic releases from the Eurozone. After spending most of the day in the higher 1.32’s, the EUR fell after the release of French PMI into the mid 1,32 level then fell further after EMU PMI was reported. EMU PMI fell to 47.3 from 48.6. The consensus had been for a rise to 49.9. Manufacturing PMI went from 47.9 to 47.8, consensus was for 48.5 and services PMI fell to 47.3 from 48.6. The consensus had been 49.0. These numbers caused the EUR to fall through the 1.3200 level and is currently trading around 1.3190.
Technically we have broken through numerous support levels, but the main one was the 1.3230 trendline support. This break could trigger further weakness and a break of the 1.3185 area targets 1.3120. A close above the 1.3300 level is now needed to reverse this downward trend.
As for the other currencies, the USD/JPY is trading towards the lower end of its overnight trading range. The apparent strengthening of the JPY is being scene more as a move in the selling of the EUR/JPY cross as opposed to a move in the JPY. Nothing much has come out of Japan since the G20 meeting over the weekend to change the thinking as far as PM Abe’s plans for continued easing.
AUD and CAD have both moved lower as commodities take a hit on the FOMC news, but there does not seem to be much “panic” selling here. USD/CAD is currently looking to test resistance at 1.0200, and a break here could see a move towards 1.0225. AUD has managed to remain above the 1.0225 support level. USD/CHF has moved higher as well, breaking through .9330. As always the CHF moves in concert with the EUR and a weaker EUR, usually means a weaker CHF.
Lastly, the GBP regained the 1.5200 handle after better than expected Public Sector Net Borrowing Requirement news was released. January UK PSNBR was -GBP9.861 billion which was an improvement on December’s -GBP12.416 billion. Market consensus had been -GBP11.200 billion
So what do we foresee this morning in North America? The TV business news shows will continue to focus on yesterday’s FOMC release. I am sure they have lined up every former member of the FOMC to get his or her take on the minutes. Meanwhile, the currency market most likely shows a bit of a rebound against the USD.
EUR is quite oversold on the shorter term chart and some profit taking should be expected. One other thing to consider is the “power” that ECB President Draghi has shown concerning currencies. One small comment about the EUR strength could propel the single currency right back to yesterday’s earlier levels. It will be interesting to see if anything is said.
Personally, I think we bounce a bit, then probe lower, looking to retest the overnight low of 1.3177.
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