Euro Trades Sideways as Italian and Spanish 2-year Yields Jump Ahead of ECB

Today is the day we’ve been waiting on for since late-July. Back then, European Central Bank President Mario Draghi promised to do “whatever it takes” to save the Euro, and today’s meeting is expected to reveal the technical details of the plan that should buy more time for the struggling Italian and Spanish economies. As per a report by Bloomberg News yesterday, the ECB will be unlimited quantities of securities whose maturities are three-years or less, but sterilize (or offset) the bond purchases with sales elsewhere. Will this be effective?

We think not. An unlimited sterilized bond-buying program is nothing more a version of the Federal Reserve’s Operation Twist, and as Goldman Sachs called it yesterday, “SMP 2.0.” “SMP 1.0” was the securities market program that was in effect in late-2011 and early-2012, which soaked up peripheral debt in the secondary markets. However, just like the longer-term refinancing operations (LTROs 1 and 2), the first iteration of the SMP proved to be ineffective: if they were effective, we wouldn’t be discussing the fourth major program to be announced over the past year.

Despite the rumored plan which would see the ECB buy shorter-dated securities, specifically with maturities of three-years or less, peripheral European bonds have weakened. The Italian 2-year note yield has increased to 2.504% (+13.0-bps) while the Spanish 2-year note yield has increased to 3.043% (+7.3-bps). Conversely, the Italian 10-year note yield has decreased to 5.460% (-3.1-bps) while the Spanish 10-year note yield decreased to 6.244% (-10.7-bps); lower yields imply higher prices.

RELATIVE PERFORMANCE (versus USD): 10:37 GMT

AUD: +0.47%

NZD:+0.26%

CAD:+0.22%

EUR:+0.15%

CHF:+0.12%

GBP:+0.04%

JPY: -0.10%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.13% (-0.33% past 5-days)

ECONOMIC CALENDAR

There are several important data releases this morning that could force major moves across the spectrum. At 07:00 EDT / 11:00 GMT, and perhaps the least important event on the day, the Bank of England Rate Decision is due, where rates will remain on hold at 0.50%. At 07:45 EDT / 11:00 GMT, the European Central Bank Rate Decision is due, followed by President Mario Draghi’s Press Conference at 08:30 EDT / 12:30 GMT. Read my full thoughts here. At 08:15 EDT / 12:15 GMT, the USD ADP Employment Change report for August will be released, and is expected to show a modest uptick in private sector jobs. At 08:30 EDT / 12:30 GMT, the USD Initial Jobless Claims report for the week ending September 1 is due, and is expected to show improvement. At 10:00 EDT / 14:00 GMT, the USD ISM Non-manufacturing Composite for August will be released, and is expected to show growth, albeit at a slightly weakened pace.

TECHNICAL OUTLOOK

BB represents Bollinger Bands ®

EURUSD: As noted earlier this week, “The Bull Flag previously noted within the EURUSD ascending channel/wedge off of the July 24 low has broken to the upside, with a test of 1.2600 line as with potential for 1.2625/35. Still, there is a potential Inverse Head & Shoulders pattern in the works since late-June. Given the Head at 1.2040/45, this would draw into focus 1.2760 (would come amid a major breakout) as long as price holds above 1.2405. Interim resistance comes in at1.2625/35 (former yearly lows, last week’s high) and 1.2660/75 (long-term descending channel resistance). Near-term support comes in at 1.2560, 1.2500, 1.2440/45 (former swing highs), 1.2405 (Neckline), 1.2310/30, 1.2250/65, and 1.2155/70.”

USDJPY: As noted earlier this week, “The USDJPY closed below the key 78.60 level yesterday for the second consecutive day, exposing former swing lows near 78.10/20, as expected. This level coincides with former June swing lows and a level of resistance for most of July (note the daily wicks above said level but no closes). For now, this is the most important level: potential exists for a rally back into 79.10/20 as long as 78.60 holds, whereas a daily close below suggests a move towards 78.10/20 at the minimum. Penetration of the August low at 77.90 will likely result in a washout to new lows with the potential for 77.65/70 and 77.30.”

GBPUSD: With little changed, “The GBPUSD continues to push higher towards topside channel resistance, as expected. We do believe, however, that this is the “final push higher before the next leg lower.” Key levels for the near-term are 1.5880/1.5900 to the upside and 1.5770/90 to the downside; we are continuing to become overextended on shorter-term charts, suggesting that another failure at 1.5900 could lead to profit taking before further bullish price action. A daily close below 1.5770/90 over the coming days should lead to a drop into 1.5700/20. Beyond that, support comes in at 1.5635/40 (last week’s low), and 1.5625 (ascending trendline support off of August 6 and August 10 lows). A daily close above 1.5900 points towards 1.5985.”

AUDUSD: The AUDUSD has broken down even further today, fading the entire RBA bounce. Although price has found support at the 100-DMA, a new downtrend is in place now that the pair has closed below the 200-DMA for multiple days. Near-term resistance comes in at 1.0275/90, 1.0345, 1.0420 1.0480, 1.0530/45 (former swing highs, and would also represent a break of the downtrend off of the August 9 high), and 1.0600/15 (August high). Near-term support comes in at 1.0195/1.0200 (100-DMA), 1.0160/75 (late-July swing low, this week’s low) and 1.0100 (mid-July swing low

Aussie and Euro Get Big Boosts from Chinese, ECB Stimuli

Risk is firmly on today with positive signs across the board, from bonds to stocks, from currencies to…well, precious metals aren’t buying the developments over the past few days. While the Australian Dollar and the Euro are leading the charge higher against the traditional safe havens, the Japanese Yen, the Swiss Franc, and the US Dollar, Gold and Silver have sold off a bit through the Asian and European sessions.

This comes as a bit of a surprise, considering the promise of additional stimulus, which has usually come in the form of more liquidity from central banks, typically sends investors into precious metals as hedges against fiat dilution. We thus suspect that despite the time buying measures from the European Central Bank yesterday and the Chinese government today (in announcing a ¥1 trillion yuan infrastructure stimulus package) are being largely overlooked in favor of key labor market data out of the United States ahead of the US cash equity open this morning. The US Nonfarm Payrolls report isn’t just key for Gold and Silver; it is crucial for the Federal Reserve’s policy meeting next week.

How important is labor market data to the Federal Reserve? In his key address at the Jackson Hole Economic Policy Symposium, Federal Reserve Chairman Ben Bernanke argued that not only has quantitative easing helped the US economy, that withstanding a further improvement in the US employment situation, more easing could deployed. Hence, the importance of today’s Nonfarm Payrolls report for August. According to a Bloomberg News Survey, +130K jobs were added last month, while +163K jobs were added in July. Similarly, the Unemployment Rate is expected to remain on hold at 8.3%. The decline in jobs growth is discouraging, but the four-week average rose to +95.5K in August from +90.5K in July, suggesting that the recent slowdown may be over. If this is a weak figure, the US Dollar will be hit very hard.

Taking a look at credit, bond markets are giving their sign of approval, thus far, to the ECB’s plans. The Italian 2-year note yield has increased to 2.164% (+2.5-bps) while the Spanish 2-year note yield has decreased to 3.734% (-3.8-bps). On the longer-end of the curve, the Italian 10-year note yield has decreased to 5.106% (-13.2-bps) while the Spanish 10-year note yield has decreased to 5.678% (-28.2-bps); lower yields imply higher prices.

RELATIVE PERFORMANCE (versus USD): 11:05 GMT

AUD: +0.50%

EUR:+0.49%

NZD:+0.11%

CAD:+0.11%

GBP:-0.04%

JPY:-0.14%

CHF: -0.37%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.16% (-0.13% past 5-days)

ECONOMIC CALENDAR

There are several important data releases this morning, starting off with labor market data out of Canada and the United States at 08:30 EDT / 12:30 GMT. The CAD Net Change in Employment (AUG) is expected to show a rebound in jobs creation, but the CAD Unemployment Rate (AUG) will be on hold at 7.3%. Meanwhile, the USD Change in Nonfarm Payrolls (AUG) report should show a +142K print from +172K in July, which would leave the USD Unemployment Rate (AUG) unchanged at 8.3%. At 10:00 EDT / 14:00 GMT, the GBP NIESR Gross Domestic Product Estimate (AUG) will be released.

TECHNICAL OUTLOOK

BB represents Bollinger Bands ®

EURUSD: The EURUSD has threatening a major breakout today, pushing through formerly yearly lows at 1.2625/30 and the descending trendline off of the August 2011 and October 2011 highs. While this would buck the yearlong downtrend that has been in play up to 1.2740/50 (just below the measured 1.2760 target off of the Inverse Head & Shoulders), there could be some profit taking soon for a small pullback. Overall, with price supported by 1.2440/45, our outlook remains bullish, and a shift in our medium-term bias would be necessary if price closes above 1.2670 today. Near-term resistance comes in at 1.2740/50 (mid-June swing highs), 1.2820/25 (late-May swing highs), and 1.2980/1.3000. Support comes in at 1.2625/30 (former yearly lows), 1.2500/10, and 1.2460/80.

USDJPY: Strong jobs data and some relief in the Euro-zone crisis has helped spur the USDJPY higher, with price closing back above the key 78.60 level yesterday. Now, there is scope for gains into 79.20/30, confluence of the 100-DMA, 200-DMA, and the descending trendline of off the April 20 and June 25 highs. Accordingly, a break of this downtrend is contingent upon strong US labor market data today in the form of the US Nonfarm Payrolls report. A daily close below 78.60 suggests a move towards 78.10/20 at the minimum (a level of demand this week as well as through early-August). Penetration of the August low at 77.90 will likely result in a washout to new lows with the potential for 77.65/70 and 77.30.

GBPUSD: The GBPUSD finally cracked through topside channel resistance at 1.5900/05 yesterday, but thus far has struggled to produce meaningful gains higher. With an Inverted Hammer forming on the daily chart, there is evidence to believe that a false breakout may have formed. If price fails to eclipse 1.5910 on the close today, there is scope for a pullback towards 1.5770/90. However, a weekly close above said level gives reason to believe that a run up to 1.6120/40 is possible during September.

AUDUSD: The AUDUSD is back on the rebound following Chinese infrastructure stimulus measures, definitively breaking the steep descending channel off of the August 22 high and trading back into its former channel off of the August 9 high. Accordingly, topside resistance comes in at 1.0350/55 (20-DMA), 1.0370/80 (channel resistance) and 1.0410/20 (mid-August swing lows). A breakdown eyes 1.0275/1.0300, 1.0210/25, and 1.0160/75 (weekly low).

Concerns Over Bailout Funds Weigh on Euro, Lift Japanese Yen

The Japanese Yen and the US Dollar are leading the majors today as some risk-aversion has taken hold amid broadening concerns out of Europe. We note that these influences are three-fold: German business sentiment as measured by the IFO dropped further as investors remain reticent despite the European Central Bank’s ‘bazooka’ plan; the German Finance Ministry has dismissed reports suggesting that the European Stability Mechanism (ESM) would be leveraged from €500 billion to €2 trillion to accommodate the future bailouts of Italy and Spain; and media has concentrated on some disagreements between French President Francois Hollande and German Chancellor Angela Merkel in terms of a pan-European banking union.

With respect to the ESM, the German Finance Ministry did note that no number has yet to be agreed upon for the leverage that will be employed, so essentially it is hapless to speculate on the size of the ESM. That’s that, for now.

With respect to the disagreement between French and German leaders, Chancellor Merkel refuted President Hollande’s quip that the banking union should be completed on a timetable of “the earlier, the better.” With the ECB buying politicians time, it is off little surprise that the urgency behind implementing the necessary safeguards has died down a bit. But Chancellor Merkel is making sure leaders get this round of measures right even as financial markets “are watching Europe [and] want to see results,” saying that “[the banking union] has to be thorough, the quality has to be good and then we’ll see how long it takes,” she said.

Taking a look at credit, peripheral European bond yields are mixed amid the Euro’s weakness. The Italian 2-year note yield has increased to 2.231% (+11.7-bps) while the Spanish 2-year note yield has decreased to 2.973% (-2.7-bps). Likewise, the Italian 10-year note yield has increased to 5.080% (+5.2-bps) while the Spanish 10-year note yield has decreased to 5.716% (+5.1-bps); higher yields imply lower prices.

RELATIVE PERFORMANCE (versus USD): 10:52 GMT

JPY: +0.15%

GBP:-0.08%

CHF:-0.41%

CAD:-0.47%

EUR:-0.53%

AUD:-0.58%

NZD: -0.93%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.19% (+0.40% past 5-days)

ECONOMIC CALENDAR

There are no key data releases on the docket for today, suggesting that prevailing sentiment and technical trends will continue to dictate price action for the next 24-hours.

TECHNICAL OUTLOOK

BB represents Bollinger Bands ®

EURUSD: Price has traded below soft support at the 61.8% Fibo retracement (February 2012 high to the July 2012 low) at 1.2934 today, breaking to fresh lows unseen in the Fed’s QE3 era. The daily RSI has exited overbought territory and is trending lower, though the 4-hour RSI is close to oversold again with some significant diverging (given the relationship between price and RSI the last time the 4-hour RSI was at this level). Interim resistance lies at 1.2930/35, 1.2970/75 (5-EMA), 1.3145, 1.3165/70, and 1.3240. Near-term support comes in at 1.2820/30 (200-DMA, late-April swing high) and 1.2825/30 (20-EMA, 200-DMA).

USDJPY: The USDJPY continues to move lower off of the pullback at trendline resistance last week, spurred on by a general feeling of disappointment on the BoJ’s newest stimulus measures has created the ideal sell-off situation. Now that price is below 78.10/20, 77.90, 77.65/70 (June 1 low), 77.45/50, and 77.10/15 (September low). A close above 78.10/20 leaves open the possibility for a rebound to 78.60 and 79.10/30 (100-DMA, 200-DMA, descending trendline off of the April 20 and June 25 highs).

GBPUSD: The pair has pulled back to the key 5-EMA at 1.6210 (for an indication of short-term strength) and as noted last Thursday, “the gap between the 5-EMA and the 20-DMA has started to turn lower, suggesting a compression of price is occurring. If the 5-EMA holds, we’re looking for further rallies; if not, support is close by.” This has proven to be the case the past few days, though a break of the 5-EMA is threatening today. The key 1.6120/40 level, broken on Friday, remains our guide for bullish/bearish price action. As long as the GBPUSD closes above said level this week, the door is open for a move towards 1.6400 by the end of the month. The former April swing highs at 1.6260 (by close), 1.6300 (by high) are in focus, now that the descending trendline off of the April 2011 and August 2011 highs broke last week. Below 1.6120/40 support comes in at 1.6030/35 (20-DMA), 1.5970 (ascending trendline off of August 2 and August 31 lows, former channel resistance off of June 20 and August 23 highs), and 1.5770/85 (late-August swing lows).

AUDUSD: The pair remains range bound the past several days, trading in a 120-pip range the past three-days. The descending trendline off of the August 9 and August 23 highs has kept the pair supported the past four-days, and it remains that the 20-EMA overlapping at 1.0420/25, a base could be building for the next move higher. As long as this level holds today – despite the intraday spike lower – we continue to look higher. Near-term resistance comes in at 1.0410/25 (descending trendline off of the August 9 and August 23 highs, 20-DMA, mid-August swing lows), 1.0480/85, 1.0550/60, and 1.0615/30 (August high). Support comes in at 1.0365/80 (last week’s low, 50-EMA) 1.0325 (200-DMA), and 1.0250/70.

EURUSD Weakens to 1.2900; SNB’s Floor Maintenance Scheme Revealed

A lack of data and news in the overnight has left the majors trading in tight ranges over the past few hours, with no major gaining or losing more than +/-0.18% against the US Dollar thus far on Tuesday. The top performer has been the New Zealand Dollar, followed closely by the Japanese Yen, whereas the Canadian Dollar and the Euro are trailing the pack. The implication is clear: neither the high beta and risk-correlated currencies nor the safe havens have been able to establish a clear direction on the day.

An interesting development that did occur shortly into the penning of this article was the release of some flow data by Standard & Poor’s with respect to the Swiss National Bank. According to their research, the SNB purchases some €80 billion of core Euro-zone credit during the first seven-months of 2012, which help artificially lower French and German yields amid the SNB’s quest to keep the EURCHF exchange rate tempered near 1.2000.

What’s interesting about this is that some of the concerns about the discrepancies between core and peripheral credit may have in fact been provoked by the SNB – making the European Central Bank’s job that much more difficult (as the crisis thus looked more exaggerated). Accordingly, a positive feedback loop was potentially created, in which the EURCHF floor is maintained by buying core debt, which makes peripheral debt look worse, which makes investors flee to safety, which pressures the EURCHF floor, which forces the SNB to buy more debt (printing Swiss Francs)…perhaps the SNB floor had consequences after all.

Taking a look at credit, peripheral European bond yields are creeping higher. The Italian 2-year note yield has increased to 2.283% (+9.8-bps) while the Spanish 2-year note yield has increased to 3.003% (+8.3-bps). Similarly, the Italian 10-year note yield has increased to 5.086% (+5.8-bps) while the Spanish 10-year note yield has increased to 5.665% (+4.6-bps); higher yields imply lower prices.

RELATIVE PERFORMANCE (versus USD): 10:58 GMT

NZD: +0.10%

JPY:+0.09%

GBP:+0.02%

CHF:-0.06%

AUD:-0.08%

EUR:-0.14%

CAD: -0.18%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.01% (+0.04% past 5-days)

ECONOMIC CALENDAR

The economic docket is fairly light today though there are a few data due that have piqued our interesting. At 08:30 EDT / 12:30 GMT, CAD Retail Sales (JUL) will be released and should show a small rebound. At 10:00 EDT / 14:00 GMT, the USD Consumer Confidence (SEP) report will be released, and sentiment is expected to have risen to its highest level in two-months. Also released at that time is the USD House Price Index (JUL), which is expected to show slight price growth, thought at a slower rate in June.

TECHNICAL OUTLOOK

EURUSD: Nothing has changed: “Price has traded below soft support at the 61.8% Fibo retracement (February 2012 high to the July 2012 low) at 1.2934 today, breaking to fresh lows unseen in the Fed’s QE3 era. The daily RSI has exited overbought territory and is trending lower, though the 4-hour RSI is close to oversold again with some significant diverging (given the relationship between price and RSI the last time the 4-hour RSI was at this level). Interim resistance lies at 1.2930/35, 1.2950/55 (5-EMA), 1.3145, 1.3165/70, and 1.3240. Near-term support comes in at 1.2820/30 (200-DMA, late-April swing high) and 1.2825/30 (20-EMA, 200-DMA).”

BB represents Bollinger Bands ®

USDJPY: The USDJPY continues to move lower off of the pullback at trendline resistance last week, spurred on by a general feeling of disappointment on the BoJ’s newest stimulus measures has created the ideal sell-off situation. Now that price is below 77.90, 77.65/70 (June 1 low), 77.45/50, and 77.10/15 (September low) are in focus. A close above 77.90 leaves open the possibility for a rebound to 78.10/20, 78.60 and 79.10/30 (100-DMA, 200-DMA, descending trendline off of the April 20 and June 25 highs).

GBPUSD: Nothing has changed: “The pair has pulled back to the key 5-EMA at 1.6215 (for an indication of short-term strength) and as noted last Thursday, “the gap between the 5-EMA and the 20-DMA has started to turn lower, suggesting a compression of price is occurring. If the 5-EMA holds, we’re looking for further rallies; if not, support is close by.” This has proven to be the case the past few days, though a break of the 5-EMA is threatening today. The key 1.6120/40 level, broken on Friday, remains our guide for bullish/bearish price action. As long as the GBPUSD closes above said level this week, the door is open for a move towards 1.6400 by the end of the month. The former April swing highs at 1.6260 (by close), 1.6300 (by high) are in focus, now that the descending trendline off of the April 2011 and August 2011 highs broke last week. Below 1.6120/40 support comes in at 1.6030/35 (20-DMA), 1.5970 (ascending trendline off of August 2 and August 31 lows, former channel resistance off of June 20 and August 23 highs), and 1.5770/85 (late-August swing lows).”

AUDUSD:The descending trendline off of the August 9 and August 23 highs has kept the pair supported the past four-days, and it remains that the 20-EMA overlapping at 1.0420/25, a base could be building for the next move higher. As long as this level holds today – despite the intraday spike lower – we continue to look higher. Near-term resistance comes in at 1.0425 (20-EMA, mid-August swing lows), 1.0480/85, 1.0550/60, and 1.0615/30 (August high). Interim support comes in at 1.0380/85 (descending trendline off of the August 9 and August 23 highs, 50-EMA), 1.0365 (last week’s low), 1.0335/40 (200-DMA), and 1.0270/80.

Euro Threatened By Greek Fears- Bullish Trend At Risk Going Into ECB

Talking Points

• Euro: EU Policy Makers Look At Greek Extension, ECB To Unload Debt
• British Pound: BCC Calls For More Support Amid Stagnant Economy
• U.S. Dollar: Watching Risk Sentiment Ahead Of FOMC Minutes

Euro: EU Policy Makers Look At Greek Extension, ECB To Unload Debt

The relief rally in the EURUSD continued to take shape as the exchange rate advanced to a high of 1.2928, but we may see the euro-dollar threaten the upward trend carried over from the end of July amid the heightening risk for a Greek default.

As Greece struggles to secure its next bailout payment, there’s talk that European policy makers will extend the deadline for the region to meet its budget target, while we’re seeing speculation that the European Central Bank may push its Greek debt holdings to the European Stability Mechanism amid the growing threat for another credit event. As the debt crisis continues to dampen the fundamental outlook for the euro-area, the governments operating under the fixed-exchange rate may put increased pressure on the ECB to expand monetary policy further, and the Governing Council may now look to target the benchmark interest rate as the economy faces a deepening recession.

Although the ECB is widely expected to maintain its current policy in October, it appears that a growing number of central bank officials are showing a greater willingness to lower borrowing costs further, and the rebound in the EURUSD may be short-lived as market participants raise bets for a rate cut. As the euro-dollar maintains the range carried over from the previous week, it looks as though the exchange rate will continue to track sideways going into the ECB rate decision, but we may see the pair struggle to hold above the 200-Day SMA at 1.2820 should central bank President Mario Draghi sound increasingly dovish this time around.

British Pound: BCC Calls For More Support Amid Stagnant Economy

The British Pound pared the overnight advance to 1.6168 as the British Chambers of Commerce warned that the ‘economy has been stagnant for too long and urgent measures are needed to enable businesses to drive a sustainable recovery,’ and the GBPUSD may continue to consolidate ahead of the Bank of England interest rate decision as market participants weigh the outlook for monetary policy.

Although there’s lingering bets that the BoE will continue to embark on its easing cycle over the near to medium-term, it seems as though the Monetary Policy Committee is scaling back its forecast for undershooting the 2% target for inflation as the region appears to be emerging from the double dip recession. In turn, we may see Governor Mervyn King soften his dovish tone for monetary policy, and the central bank head may endorse a neutral stance throughout the remainder of the year as the economy gets on a more sustainable path.

As the GBPUSD maintains the range from the previous day, we may see the exchange rate continue to track along the 20-Day SMA at 1.6137, but the pair may resume the bullish trend from back in July should the BoE talk down speculation for additional monetary support.

U.S. Dollar: Watching Risk Sentiment Ahead Of FOMC Minutes

The greenback is losing ground going into the North American trade, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) falling back from 9,885, and the rise in risk-taking behavior may continue to press on the reserve currency as risk trends continue to dictate price action in the FX market.

As the economic docket remains fairly light for Tuesday, we should see trader sentiment heavily influence market volatility throughout the day, but the dollar may continue to consolidate ahead of the Federal Open Market Committee Minutes on tap for Thursday we’re seeing a lot of mixed views surrounding the open-ended asset purchase program. As the new measure is expected to have a limited impact in fostering job growth, Fed Chairman Ben Bernanke may come under increased scrutiny, and the committee may slowly bring its easing cycle to an end as the world’s largest economy faces a limited risk of slipping back into recession.

FX Upcoming

Currency	GMT	EDT	Release	Expected	Prior
USD	13:45	9:45	ISM New York (SEP)		51.4
USD	21:00	17:00	Total Vehicle Sales (SEP)	14.40M	14.46M
USD	21:00	17:00	Domestic Vehicle Sales (SEP)	11.40M	11.54M
GBP	23:01	19:01	BRC Shop Price Index (YoY) (SEP)		1.1%

Euro Leads Majors with ECB Around the Corner, US NFPs Tomorrow

Price action has been mostly mixed on Thursday though trading in the pre-North American hours has resulted in a modest push upwards by high beta currencies and risk-correlated assets, led by declines by the Japanese Yen and the US Dollar. The optimism is mostly European-centric, with the Euro leading, followed closely by the British Pound and the Swiss Franc, despite the fact that equity markets remain skewed lower and Italian and Spanish bond yields have inched higher the past few hours.

The main event on today’s docket is the European Central Bank Rate Decision, although no new efforts are expected to be set forth. Instead, we are looking to President Mario Draghi’s press conference, which could offer new insight into the conditions necessary to take part of the Outright Monetary Transactions (OMTs), the bond-buying program designed to work hand-in-hand with the European Stability Mechanism (ESM) to stem the crisis.

Any commentary suggesting that the ECB remains prepared to act or rhetoric that suggests the 2013 budget set forth by Spain is sufficient for the ECB will be largely supportive of the Euro and high beta currencies. In fact, given the stall by many of the major pairs – AUDUSD, EURUSD, GBPUSD – at critical support, optimism spurred by the ECB could provoke a solid bounce ahead of tomorrow’s crucial US Nonfarm Payrolls report for September.

Taking a look at credit, peripheral European bond yields are mixed but higher, despite the Euro’s strength. The Italian 2-year note yield has increased to 2.197% (+4.7-bps) while the Spanish 2-year note yield has increased to 3.161% (+4.6-bps). Likewise, the Italian 10-year note yield has decreased to 5.067% (-1.8-bps) while the Spanish 10-year note yield has increased to 5.786% (+3.0-bps); higher yields imply lower prices.

RELATIVE PERFORMANCE (versus USD): 10:42 GMT

EUR: +0.33%

CHF:+0.28%

GBP:+0.26%

CAD:+0.18%

NZD:+0.10%

AUD:+0.03%

JPY: -0.09%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.14% (+1.00% past 5-days)

ECONOMIC CALENDAR

The economic docket is fully saturated today, with key events out of Europe in the early-North American trading hours headlining the calendar on Thursday. At 07:45 EDT / 11:45 GMT, the EUR European Central Bank Rate Decision will be announced and it is widely expected that the key interest rate will be on hold at 0.75%. ECB President Mario Draghi’s Press Conference at 08:30 EDT / 12:30 GMT should also provide some additional volatility for traders, though we’re not expecting anything major or new at the presser – compared to last time, when the OMTs were announced, this one could be a real ‘snoozer.’ Also at 08:30 EDT / 12:30 GMT is the release of the USD Initial Jobless Claims (SEP 29) report, which is expected to show that last week’s outperformance was more or less a fluke.

After North American trading begins, at 10:00 EDT / 14:00 GMT, the USD Factory Orders (AUG) report is due, and following the disappointing Durable Goods Orders report from last week, another contraction is expected. A miss wouldn’t surprise here. Finally, at 14:00 EDT / 18:00 GMT, the USD Federal Reserve Releases the Minutes from the September 13 FOMC Meeting, and while little ground breaking information is expected, we will see how divided the Fed really was over QE3.

TECHNICAL OUTLOOK

EURUSD: More consolidation and drift higher has kept our outlook unchanged. Yesterday we noted that “[as long as the 200-DMA holds], we look towards the 61.8% Fibo retracement (February 2012 high to the July 2012 low) at 1.2934 again.” Indeed, this is playing out, with the pair moving back towards the weekly highs at 1.2965/70. Resistance lays there, 1.3000, 1.3145, and 1.3165/75 (September high). Support comes in at 1.2915/20 (5-EMA), 1.2870/75 (20-EMA), and 1.2820/30 (200-DMA, late-April swing high).

USDJPY: Yesterday I said “We’re back to 78.10/20, and a daily close above eyes resistance at 78.40/60 (50-EMA), 78.80/90 (100-DMA, descending trendline off of the April 20 and June 25 highs), and 79.20/30 (200-DMA, September high). Should price close at or below 78.10/20, support comes in at 77.90, 77.40/45 (September 28 low), 77.65/70 (June 1 low) 77.45/50, and 77.10/15 (September low).” Today the USDJPY has held in the 78.40/60 zone, a level that was pivotal in August. With descending TL resistance overhead, further upside price action is likely capped.

GBPUSD: The GBPUSD closed below major support yesterday, 1.6100/20 (20-EMA, descending trendline off of April 2011 and August 2011 highs, ascending trendline off of August 2 and August 31 lows), though there’s been no follow through thus far today. As noted yesterday, “A break below suggests a move to 1.5970/75 (former channel resistance off of June 20 and August 23 highs), and 1.5770/85 (late-August swing lows. Resistance comes in at 1.6165/80 (late-September and early-October intraday swing levels), 1.6260 (the former April swing highs by close) and 1.6300 (by high).”

AUDUSD: After setting fresh October lows early in trade on Thursday, the pair has rebounded and is working on a Doji candlestick now, a sign of indecision, and after a major downturn, perhaps a signal for a short-term correction. The levels noted yesterday hold: “Resistance comes in at 1.0275, 1.0330, 1.0405/25 (mid-August swing lows), and 1.0470/85 (former intraday swing levels). Support comes in at 1.0160/75 (mid-July and early-September swing levels), 1.0100/10, and 1.0000.”

SPX500: The SPX500 remains in a very gradual uptrend off of the June 1 low, and more recently has found itself trading in a tighter ascending channel the past ten-weeks. Since early-August, the 20-EMA has been strong support, with no two consecutive closes below occurring. We also note that over this time frame the daily RSI has not moved below 50. The SPX500’s resilience in the face of a stronger US Dollar leads me to believe that another run at the highs is around the corner. Resistance comes in at 1458/60, 1475, and 1498/1504. Support comes in at 1443/45 (20-EMA), 1425 (the 61.8% Fibo retracement on June 2012 low to September 2012 high), 1420/22 (50-EMA).

GOLD: Gold’s consolidation the past few weeks has been necessary from a technical perspective, in order to clear out some of the short-term congestion faced given overbought conditions. It is important to consider that the sharp ascending trendline off of the August 15 and August 31 lows has held, now reinforced by the 20-EMA at 1750/55, also former intraday swing lows throughout mid-September. However, the sharp uptrend has brought Gold into the very important 1785/1805 zone, where former highs were set in November 2011 and February 2012. If this resistance breaks, a move to 1840 shouldn’t be ruled out. Another failure at 1785/1805 would likely result in a pullback to 1750/55.

Aussie and Kiwi Lead, Yen Stable on BoJ; US Dollar Steady Ahead of NFPs

How similar the market looks today at this time as it did when this piece was written yesterday. As noted yesterday, “Price action has been mostly mixed on Thursday though trading in the pre-North American hours has resulted in a modest push upwards by high beta currencies and risk-correlated assets.” The only difference this time is that the European currencies are lagging, as the optimism for the move higher has not been European-centric but rather Asian-centric.

Curiously, there’s been little by way of data or central bank action that would suggest high beta currencies and risk-correlated assets should move higher: the Bank of Japan held its stimulus package at ¥55 trillion last night (as suggested in the Real Time News feed, the BoJ was not expected to change its program); and Australian construction data for September showed a drop in activity. It is thus possible that the rebound we’ve seen in the leading Australian and New Zealand Dollars could just be an unwinding of the negative sentiment that has dominated the market in recent weeks (re: China). Coupled with both majors sitting at crucial support levels, it has only take a little nudge to push them higher.

Overall, the markets are relatively calm ahead of the US cash equity open, with the Japanese Yen and US Dollar nearly even on the day, as market participants await the September labor market reading for the US. The Nonfarm Payrolls report due today is not drawing the same attention that previous reports have (for economic and political purposes: will the Federal Reserve ease more? Will NFPs influence the Presidential election?), though given the volatility that this report has generated in the past, we’re not discounting what could be the biggest market moving event of the week.

Taking a look at credit, peripheral European bond yields are lower, indicating potential support for the Euro. The Italian 2-year note yield has decreased to 2.162% (-5.3-bps) while the Spanish 2-year note yield has decreased to 3.122% (-7.6-bps). Similarly, the Italian 10-year note yield has decreased to 5.040% (-7.0-bps) while the Spanish 10-year note yield has decreased to 5.332% (-5.5-bps); lower yields imply higher prices.

RELATIVE PERFORMANCE (versus USD): 10:47 GMT

NZD: +0.33%

AUD:+0.08%

JPY:+0.03%

CAD:-0.04%

GBP:-0.04%

EUR:-0.05%

CHF: -0.11%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.02% (-0.07% past 5-days)

ECONOMIC CALENDAR

The economic docket is supersaturated today, with key labor market readings from Canada and the United States scheduled to be released at 08:30 EDT / 12:30 GMT. First, the Canadian data: the CAD Net Change in Employment (SEP) was +10.0K in September, from +34.3K in August, which should keep the CAD Unemployment Rate (SEP) on hold at 7.3%. In terms of the US data: the USD Unemployment Rate (SEP) is expected to have ticked higher to 8.2% as jobs growth, as evidenced by the USD Change in Nonfarm Payrolls (SEP) report, is not strong enough to keep up with population growth and the rate of entrants to the labor market (even though the participation rate remains at or near all-time or multidecade lows for a number of key demographics, including middle-aged working class men). NFPs are expected to print +115K from +96K in August, which would come in above the trailing four-month average of +92.3K.

Later on in the day, close to the US cash equity close, the USD Consumer Credit (AUG) report is due, and should show that credit growth rebounded – which comes as no surprise given the seasonal influence of young adults returning to secondary educational institutions and new entrants to the labor market trying to make ends meet. Moreover, considering that wages adjusted for inflation have been steadily falling for the past several quarters, as a consumption-based economy, the only way US economic growth can remain positive amid lower disposable income is for consumers to use credit (take on debt).

TECHNICAL OUTLOOK

EURUSD: The strong performance yesterday cleared a number of important resistance levels, including the psychologically significant 1.3000. But considering that we’re still within prices we’ve seen over the past two-weeks, our key levels remain the same. Resistance comes in at 1.3030/35 (October high), 1.3145, and 1.3165/75 (September high). Support comes in at 1.3000, 1.2960/65 (5-EMA), 1.2890/95 (20-EMA), and 1.2820/30 (200-DMA, late-April swing high).

USDJPY: Yesterday I said “Today the USDJPY has held in the 78.40/60 zone, a level that was pivotal in August. With descending TL resistance overhead, further upside price action is likely capped.” Indeed, price is stuck in the same zone, which means our outlook is little changed. A daily close above 78.40/60 (50-EMA) suggests a move to 78.80/90 (100-DMA, descending trendline off of the April 20 and June 25 highs), and 79.20/30 (200-DMA, September high). Should price close at or below 78.40/60, support comes in at 78.10/20, 77.90, 77.65/70 (June 1 low),77.40/45 (September 28 low), and 77.10/15 (September low).

GBPUSD: The lack of follow through on the break from Wednesday led to a sharp rebound yesterday, with the GBPUSD closing back above major support at 1.6100/25 (20-EMA, descending trendline off of April 2011 and August 2011 highs, ascending trendline off of August 2 and August 31 lows). However, there’s been little progress today, so we think it is possible that there’s a healthy retest of the key support. A break below suggests a move to 1.5970/75 (former channel resistance off of June 20 and August 23 highs), and 1.5770/85 (late-August swing lows. Resistance comes in at 1.6260 (the former April swing highs by close) and 1.6300 /10 (September high).

AUDUSD: A bullish Outside Day yesterday after holding key support gives us a bias higher. However, the pair has run into resistance once support, at 1.0270 and 1.0255 today, the descending trendline off of the September 12, September 20, and September 26 lows. Resistance comes in at 1.0255/75, 1.0330, 1.0405/25 (mid-August swing lows), and 1.0470/85 (former intraday swing levels). Support comes in at 1.0160/75 (mid-July and early-September swing levels), 1.0100/10, and 1.0000.

SPX500: A push to the highs remains around the corners. “Since early-August, the 20-EMA has been strong support, with no two consecutive closes below occurring. We also note that over this time frame the daily RSI has not moved below 50.” Resistance comes in at 1475, and 1498/1504. Support comes in at 1458/60, 1445/47(20-EMA), 1425 (the 61.8% Fibo retracement on June 2012 low to September 2012 high), and 1423/25 (50-EMA).

GOLD: Gold is hovering in the crucial 1785/1805 resistance zone, and today’s NFPs could result in the break or the pullback to support. It is important to consider that the sharp ascending trendline off of the August 15 and August 31 lows has held, now reinforced by the 20-EMA at 1755/60, also former intraday swing lows throughout mid-September. If this resistance breaks, a move to 1840 shouldn’t be ruled out. Another failure at 1785/1805 would likely result in a pullback to 1750/55.