Major developments fueled risk appetite sentiment last week as traders were pleasantly surprised by the FOMC decision to launch QE4, the better than expected Chinese data, and the formal approval of Greece’s bailout payment. Of course, last week was not all peaches and roses, sovereign outlooks for both UK and France were downgraded by credit rating agencies, Japan has fallen back into recession, the U.S. fiscal cliff continues, and the political instability in Italy brought a new round of uncertainties… The week ended mixed with EURUSD retesting the high established in September, but most U.S. equity indices remained on the negative side…
In the U.S., the Fed surprised the market by dropping its low rate pledge to mid 2015 and replaced its policy with thresholds based on real economic performance. The Fed will keep the ultra-easy monetary policy in place for as long as unemployment stays above 6.5% and inflation remains within 0.5% of its 2% target. Fed chief Bernanke further clarified in the Press Conference that the new policy is far from autopilot, and the mere occurrence of the unemployment below the 6.5% boundary would not automatically trigger policy changes. The Fed will be looking at a variety of employment indicators, including payrolls, hours worked and participation rates and more when determining policy going forward.
In addition, the Fed decided to end Operation Twist as expected and launched a new program to outright purchase treasury in the tune of $45B a month, matching the same amount of purchases under Operation Twist… Some are already calling the program QE4, since unlike Operation Twist, the aim of QE4 is to outright purchase of treasuries instead of merely adjusting the debt holdings… The Fed will also keep purchasing $40B in MBS, or QE3.
In Europe, the European equities largely ignored the final release of funding to Greece, although EURUSD did breach the 1.3120 level by the end of the week, thanks in part of the agreement on a unified bank regulatory authority for the EU by the ECB. With Greece no longer facing pressures leaving the EU and Spain seemingly to have gotten hold of its finances, market expectations for Europe have shifted towards a more neutral tone in my opinion.
In Switzerland, the Swiss Franc weakened a bit through the middle of the week after UBS followed moves by other Swiss Banks to introduce fees on credit balances in CHF cash clearing accounts held by financial institutions at UBS Zurich. EUR/CHF probed above the 1.2120 level repeatedly in the second half of the week, although CHF did regain some grounds after SNB reiterated its pledge to keep the EURCHF peg at 1.2000, disappointing the market as traders had hopes that perhaps SNB would increase the peg to 1.3500.
In Japan, latest GDP releases showed that Japan has entered into a technical recession; Japan final Q3 GDP came in at an annualized rate of -3.5% and the final Q2 reading was revised to -0.03%, or two consecutive quarters of negative GDP… With the outlook for Q4 being worse than Q3, yen’s weakness is likely to continue in the coming weeks, especially considering that the LDP party has solidified its lead ahead of parliamentary elections on Sunday.
In China, the November data published further signaled its economy is finally bottoming out. The HSBC flash manufacturing PMI came above 50 for the second release in a row, wrapping up the week in a positive tone.
In conclusion, EUR is likely to remain bullish, and considering the way EURUSD traded on Friday, I now expect to see the pair break the 1.3170 level and potentially lead the FX market to a new round of risk appetite move, with EURUSD ultimately reaching the 1.3400. GBP is likely to retest the 1.6300 level, following the bullishness of EUR, or weaknesses in both USD and JPY. USD and JPY are likely to remain neutral to bearish, especially with the Feds launching QE4 and the new Japanese government to respond with powerful easing of their own. In short, I would not recommend to BUY USD or JPY. CAD is likely to remain subdued, kept in a tight range, and since the market will be focusing on the EUR, USD, and JPY, I’d recommend to skip CAD for the week. AUD and NZD should also remain well supported, although they have been at the top of their respective ranges for some time now; it is probably best to stay away from them unless you are in a trade. CHF could strengthen, although the only pair that has more potential is probably EURCHF, so tread carefully as this pair could drop if and when SNB decides to relieve some of its FX reserves accumulated in the defense of EURCHF peg… The USDCHF is probably already at the support level, therefore it is not my first choice to trade.
Here’s the list of tradable releases for the week:
(*) Released at the same time.
Forex Market Review And News Calendar For December 17 ~ 21, 2012
December 16, 2012 by 5 Comments