25 Banks Fail ECB’s Stress Test, Rousseff Wins Presidential Rally
Ipek Ozkardeskaya | Oct 27, 2014 05:11AM ET
Market Brief
Dilma Rousseff has been re-elected President in Brazil with 52% of valid votes. Given the defeat of market-oriented Neves, Next Funds Ibovespa linked ETF lost more than 5% in Tokyo exchange with a trading volume above 1.5mn yen (vs 0.312mn average on 15 days). BRL is expected to take a slide in Brazil at today’s open. USD/BRL closed at 2.4739 on Friday, traders should stand ready for a gap-open. BRL selling pressures will likely prevail following the knee-jerk negative market reaction in Asian trading. Light resistance is presumed at 2.5179 (Thu Oct 23rd high), more resistance is seen at 2.62s (December 2008 high).
In the Euro-zone, 25 banks out of 130 failed ECB’s stress test over the weekend, among them 9 Italian, 3 Cypriot, 3 Greek, a French and a German bank. EUR/USD saw support at 1.2672 in Asia, due to more USD weakness before Wednesday’s FOMC decision. Although the sentiment in EUR remains strongly negative, some additional short-covering should temper the EUR sell-off. CFTC data confirms the solid negative bias in EUR speculative future positions (-0.159M contracts on week to Oct 21st). The ECB will announce how much it spent in covered bond purchases last week; traders’ guess is about 800 million euros. The official data will hint at the pace the ECB may achieving its 1 trillion balance sheet expansion. The event risk remains high in EUR; option barriers trail pre-1.2800 for today expiry. The key support stands at 1.2501 (Oct 3rd low). EUR/GBP sees resistance at 0.7900 at week open. MACD (12, 26) turns negative suggesting deeper downside correction. Large option related offers wait to be activated at 0.78- for today expiry.
USD/JPY and JPY crosses were mostly offered in Tokyo. USD/JPY remained capped at 108.38 at Asia open and weakened to 107.86 (21-dma) on limited risk sentiment after ECB stress test. Currently, USD/JPY is at MACD pivot. A daily close above 108.30 will send the MACD (12, 26) in the green zone. Option bids are supportive at 107.50/108.00. The positive bias in EUR/JPY is challenged by 50/100 dma (137.56/68).
GBP/USD made a flat open, traded tight at about the 21-dma (1.6097). Trend and momentum indicators remain slightly positive, despite dovish shift in BoE expectations. According to 3Q advance data released on Friday, the UK GDP grew at the slower pace of 0.7% q/q, the GDP y/y growth decelerated from 3.2% to 3.0%. Combined to moderate recovery in the Euro-area and to slowdown fears in US and China, the BoE is now expected to delay its first rate hike to the second half of 2015 (vs. February targeted formerly). The moderate wage growth in UK labor market and the disinflationary pressures sustain a longer period of lose monetary policy in the UK. The big picture suggests further sell-off in GBP versus USD. With subdued bullish momentum and future markets pricings, we suspect that the recent strength in GBP/USD will not develop into a sizeable bullish reversal pattern. The 3-month cross currency basis confirms preference for lower GBP/USD. We expect a re-test the key support at 1.5855/75.
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The economic calendar of the day: /Swedish September Household Lending y/y, IFO Survey for German Business Climate, Current Assessment and Expectations in October, Euro-zone September M3 Money Supply y/y & 3m average, UK October CBI Reported Sales, US October (prelim) Services and Composite PMI, US September Pending Home Sales m/m & y/y, Dallas Fed October Manufacturing Activity.
Currency Tech
EURUSD
R 2: 1.2853
R 1: 1.2745
CURRENT: 1.2693
S 1: 1.2614
S 2: 1.2501
GBPUSD
R 2: 1.6186
R 1: 1.6140
CURRENT: 1.6095
S 1: 1.5995
S 2: 1.5875
USDJPY
R 2: 109.23
R 1: 108.40
CURRENT: 107.96
S 1: 107.50
S 2: 106.24
USDCHF
R 2: 0.9598
R 1: 0.9559
CURRENT: 0.9506
S 1: 0.9475
S 2: 0.9368
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