ECB And Riksbank: Aggressive Dovish Play
Ipek Ozkardeskaya | Oct 28, 2014 07:17AM ET
The FX markets trade on central bank decisions this week. The European Central Bank and the Riksbank play an aggressive easing game to avoid deflation. The ECB purchased a surprise quantity of covered bonds during last week and will continue its trillion euro operation to fight against deflation. In a surprise action, the Riksbank cut its repo rate by 25 basis points to 0.0% for the first time in its history, and kept the operational corridor unchanged at 150 basis points (-0.75% deposit rates / 0.75% marginal rate). The FOMC and the RBNZ will announce decision on October 29th and are expected to maintain status quo.
No budget for the QE?
The ECB announced the purchase of 1.704 billion euros of covered bonds during last week, this is twice as much as the market estimates (appr. 800 million euros). Starting from yesterday, the ECB will announce the amount of its purchases on weekly basis. The pool of covered bond assets available in the Euro area and adequate for the ECB’ program sums up to 600 billion euros according to ECB Vice President Constancio, the “eligible to buy” ABS stand for 400 billion euros. In total, we attain the ECB’s 1 trillion euro worth of balance sheet expansion goal. This picture presumes no QE in sight. The 40-day rolling correlation between EUR/USD and Spanish/German 10-year government yield spread advances to 56%. The diverging spread lifted EUR/USD up to 1.2723 post announcement. Combined to broad based weakness in USD pre-FOMC, we see developing strength in EUR/USD’s short-term momentum. Light option bids will likely give some support at 1.2650/ 1.2700 in today’s expiry. Offers are seen pre-1.2740 (Fib 61.8% on Oct rally), more resistance should come into play at 1.2853/86 (Fib 23.6% on May-October sell-off / Oct 15h high).
In the longer-run, the EUR sentiment remains solidly negative. A trillion euro extension in the ECB balance sheet should continue weighing on EUR-complex. The 3-month cross currency basis nears zero, suggesting that the EUR/USD future markets are almost trading at the theoretical prices. This means that the interest rate differential is the most important driver of the futures prices. In this context, the obvious Fed/ECB divergence should weigh on EUR/USD in the mid-long-run strategies.
Riksbank interest rate at 0% for the first time in history
The Riksbank cut the interest rate by 25 basis points, from 0.25% to 0.00% (vs 15 bp cut expected) in an effort to temper the deflationary fears due to moderate Euro-zone growth and ultra-lose ECB policy. In post-decision communiqué, Riksbank said “[…] the economic activity is continuing to improve. But the inflation is too low. The Executive Board of the Riksbank has therefore decided that monetary policy needs to be even more expansive for inflation to rise towards the target of 2%.” The Riksbank will not raise rates until the inflation clearly picks-up according to official statement; the Swedish policy makers think it “appropriate to slowly begin raising the repo rate in the middle of 2016”. The aggressive rate action sent USD/SEK above the 7.3285 resistance (2012 high), the pair rallied to 7.36 in a single move. The move will likely find ground at 7.30+ against USD. We target an advance towards 7.52s – 2010’s symmetrical shoulders top – walking into 2015.
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EUR/SEK rallied to 9.3483 for the first time since July 3rd. Weaker EUR convictions capped the rally pre-9.40 resistance. The RSI advanced to 68%, the 30-day upper Bollinger band (9.2743) has been significantly left behind. Nearing the overbought conditions, we see a cool-off in upside attempts. The key resistances are placed at 9.3887 (July 3rd high), 9.3979 (2011 high), 2.4275/85 (Q4, 2010 resistance). On the longer-run, we believe that the determination of Riksbank to counter the ultra-lose ECB policies should determine the preference versus the euro. The 3-month cross currency basis fades towards zero, suggesting a bigger focus on interest rate differential. In this context, the ECB’s unconventional tools (ABS, covered bond purchases, TLTROs) will no wonder keep the upside challenging for the EUR/SEK.
- 2014-10-28T12:30:00 USD Sep Durable Goods Orders, exp 0.50%, last -18.20%, rev -18.40%
- 2014-10-28T12:30:00 USD Sep Durables Ex Transportation, exp 0.50%, last 0.70%, rev 0.40%
- 2014-10-28T12:30:00 USD Sep Cap Goods Ship Nondef Ex Air, exp 0.70%, last 0.10%
- 2014-10-28T12:30:00 USD Sep Cap Goods Orders Nondef Ex Air, exp 0.70%, last 0.60%, rev 0.40%
- 2014-10-28T13:00:00 USD Aug S&P/CS 20 City MoM SA, exp 0.18%, last -0.50%
- 2014-10-28T13:00:00 USD Aug S&P/CS Composite-20 YoY, exp 5.70%, last 6.75%
- 2014-10-28T13:00:00 USD Aug S&P/CaseShiller 20-City Index NSA, exp 173.89, last 173.34
- 2014-10-28T13:00:00 USD Aug S&P/Case-Shiller US HPI YoY, last 5.61%
- 2014-10-28T13:00:00 USD Aug S&P/Case-Shiller US HPI NSA, last 167.32
- 2014-10-28T14:00:00 USD Oct Consumer Confidence Index, exp 87.1, last 86
- 2014-10-28T14:00:00 USD Oct Richmond Fed Manufact. Index, exp 11, last 14
EURUSD EUR/USD is grinding higher towards the hourly resistance at 1.2743. A break of this level is needed to alleviate concerns of a further decline towards the key support at 1.2501. Another resistance stands at 1.2845 (16/10/2014 high), while an hourly support can be found at 1.2614. In the longer term, EUR/USD is in a downtrend since May 2014. The break of the strong support area between 1.2755 (09/07/2013 low) and 1.2662 (13/11/2012 low) has opened the way for a decline towards the strong support at 1.2043 (24/07/2012 low). As a result, the recent strength in EUR/USD is seen as a countertrend move. A key resistance stands at 1.2995 (16/09/2014 high).
GBPUSD GBP/USD has bounced near the hourly support defined by the 61.8% retracement (1.5995). However, the technical structure favour a bearish bias as long as prices remain below the resistance area between 1.6184 (21/10/2014 high) and 1.6227. An initial support lies at 1.6071 (intraday low). In the longer term, given the significant deterioration of the technical structure since July, the strong resistance area between 1.6525 (19/09/2014 high) and 1.6644 (01/09/2014 high) is expected to cap any upside in the coming months. Monitor the current consolidation phase near the strong support at 1.5855 (12/11/2013 low).
USDJPY USD/JPY has weakened near the resistance implied by its recent high at 108.35. The break of the initial support at 107.79 (24/10/2014 low) favours a short-term corrective phase. Hourly supports are now given by the rising channel (around 107.57) and 107.10. Another resistance can be found at 108.74. A long-term bullish bias is favoured as long as the key support 100.76 (04/02/2014 low) holds. Despite the recent decline near the major resistance at 110.66 (15/08/2008 high), a gradual move higher is eventually favoured. Another resistance can be found at 114.66 (27/12/2007 high). A key support lies at 105.44 (02/01/2014 high).
USDCHF USD/CHF has weakened near the resistance at 0.9562. However, as long as the hourly support at 0.9473 holds, a bullish bias is still favoured. Another support stands at 0.9368, whereas another resistance can be found at 0.9593. From a longer term perspective, the technical structure favours a full retracement of the large corrective phase that started in July 2012. As a result, the recent weakness is seen as a countertrend move. A key support can be found at 0.9301 (16/09/2014 low). A resistance now lies at 0.9691 (06/10/2014 high).
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