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الاثنين، 24 سبتمبر، 2012
Euro Surges to Fresh Highs as German Court Approves ESM with Conditions
Risk-appetite is firmly switched ‘on’ today with global equity markets rallying, high beta currencies appreciating against the safe havens, peripheral European bond markets showing signs of relief, and both base metals and energy rallying thus far on Wednesday. We find this to be the case for one reason: the solidification of the European Central Bank’s bond-buying plan, which was announced last week.
As expected, and outlined in this column yesterday, the German Constitutional Court ratified the European Stability Mechanism (ESM), but with some conditions. Mainly, Germany’s involvement in the ESM can be €190 billion at maximum, at present time (in line with their current contribution). What this means is that if Germany needs to expand its contribution, the federal government (Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble) must first seek approval from the lower house of parliament, the Bundestag (akin to the US House of Representatives).
Essentially, what we have now in Europe is the bailout fund, the ESM, leveraged by the ECB to implement soft caps on sovereign yields. But for the ECB to actually buy bonds, the sovereign must agree to new reforms and international oversight in the form of the European Troika (the European Central Bank, the European Commission, and the International Monetary Fund), a tiny condition that Italy and Spain have thus far publicly decried as unacceptable.
Which leads us to the obvious conclusion: if Italy and Spain don’t apply for bailout assistance, thus rendering the ECB’s plan inactive; will promises that a floor is in place be enough to quell contagion fears? Accordingly, we believe that any implied intent to seek help from the ESM will have diminishing returns before market participants call Italy and Spain’s bluffs. The can has been kicked down the road – but for how long?
Taking a look at credit, peripheral European bond yields are back down, supporting the Euro’s move higher. The Italian 2-year note yield has decreased to 2.179% (-5.4-bps) while the Spanish 2-year note yield has decreased to 2.702% (-8.1-bps). Likewise, the Italian 10-year note yield has decreased to 5.050% (-0.4-bps) while the Spanish 10-year note yield has decreased to 5.553% (-8.2-bps); lower yields imply higher prices.
RELATIVE PERFORMANCE (versus USD): 10:55 GMT
Dow Jones FXCM Dollar Index (Ticker:USDOLLAR): -0.33% (-1.86% past 5-days)
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.
BB represents Bollinger Bands ®
EURUSD:Little has changed this week: “The EURUSD made a huge technical breakthrough on Friday by shattering a yearlong descending trendline off of the August 2011 and October 2011 highs. This now marks the potential for a long-term bottom at the 1.2040/45 low. Additionally, while our bias for a move towards 1.1500 by November 1 is negated, a weekly close back within the channel – back below 1.2620/35 (former yearly low set in January) – would suggest a false breakout has occurred.” Near-term resistance comes in at 1.2930/35 (61.8% Fibonacci retracement on February high to July low) and 1.2980/1.3000. Support comes in at 1.2820/25 (late-May swing highs), 1.2740/50, 1.2620/35, 1.2500/10, and 1.2460/80.
USDJPY:The June 1 swing low at 77.65/70 has yet to be breached, and it is unlikely that such an event will occur barring a significant fundamental catalyst: the Federal Reserve announces a major outright bond-buying program. We’ve been suggesting that “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.” While this has begun, we remain cautious over the next 24-hours. A move back above 77.90 exposes 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:We’ve maintained: “As long as price on the daily chart is supported by 1.5930/40, there’s reason to believe that a run up to 1.6120/40 is possible during September.” The GBPUSD has rallied into 1.61020/40 and has reversed, suggesting a near-term top may be in place now that the short-term trend is conflicting with major resistance in the longer-term trend. Should 1.6120/40 break, the former April swing highs at 1.6260 (by close), 1.6300 (by high) are in focus; this would also represent a break of the descending trendline off of the April 2011 and August 2011 highs. Below 1.5930/40, near-term support comes in at 1.5860/75 (ascending trendline off of August 2 and August 31 lows), 1.5770/85 (late-August swing lows), and 1.5700.
AUDUSD:The AUDUSD continues to push higher, testing 1.0500, breaching the highs set on Friday while erasing all of the losses since August 23 in the interim – in just five-days! In the short-term, there are two key levels to the upside: 1.0530/45 (former highs in July and August) and 1.0560/70 (descending trendline resistance off of the February 29 and August 9 highs). Near-term support comes in at 1.0435/45 (mid-July and early-August swings) and 1.0400.