US Dollar Plummets on Fed’s KO: Open-ended MBS Purchases

Let’s be clear: yesterday was a historic day for the Federal Reserve. In an unprecedented move, never before seen, the Fed announced an open-ended quantitative easing program, in which $40 billion of agency mortgage backed securities (MBS) will be purchased each month until the labor market recovers. But given the underlying trends in the labor market – structural weakness in manufacturing due to declining competitiveness (thanks, globalization!) as well as the lowest participation rate in the labor force in over three-decades – it’s clear that the conditions that the Fed would need to rescind its end-all be-all QE program are not going to be coming anytime soon: a “stronger economy that can cause the improvement to be sustained.”

It is of little surprise, then, that the US Dollar is taking such a beating today, falling across the board dramatically save against the Japanese Yen (we believe rising US Treasury yields and a jump in the 2s10s spread can be pointed to as a catalyst). The EURUSD has moved up to 1.3100 while the AUDUSD is back at 1.0600. Whereas it took over three-months for the EURUSD to decline from 1.3000 to 1.2042, it only took six-weeks for it to retrace all of those losses.

From a purely statistical technical perspective, the EURUSD advance has brought it into the rarefied atmosphere: the daily RSI, north of 80.00 at the time of writing (will change given that RSI is calculated on closing prices), it at its highest level since October 14, 2010. Within two-weeks, the EURUSD had topped, and over the next two-months, the pair declined by over 1200-pips. For now, 1.3120/45 looks to be a very interesting zone to the upside.

Taking a look at credit, peripheral European bond yields are back down as core credit erodes, adding to the Euro’s strong technical bias. The Italian 2-year note yield has decreased to 2.190% (-2.6-bps) while the Spanish 2-year note yield has increased to 2.802% (+0.8-bps). Additionally, the German 2-year note yield has increased to 0.088% (+3.3-bps), its highest level since early-July. On the longer-end, the Italian 10-year note yield has decreased to 4.953% (-3.3-bps) while the Spanish 10-year note yield has increased to 5.578% (+0.8-bps); lower yields imply higher prices.

RELATIVE PERFORMANCE (versus USD): 10:30 GMT

EUR: +0.75%

CHF:+0.56%

GBP:+0.51%

AUD:+0.45%

NZD:+0.43%

CAD:+0.35%

JPY: -0.70%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.30% (-1.58% past 5-days)

ECONOMIC CALENDAR

The week finishes with some significant data prints out of the United States (but we question the clout of fundamental data now that the Fed has enacted QE-Infinity). At 08:30 EDT / 12:30 GMT, the USD Advance Retail Sales (AUG) report will be released, and is expected to show a modest increase in consumption. A beat here will help the US Dollar rebound today. Also released at the same time is the USD Consumer Price Index (AUG) reading, which is forecasted to show an uptick in inflation following surging food and energy costs over the past several months. At 09:15 EDT / 13:15 EDT, the USD Industrial Production and Manufacturing Production (AUG) reports will be released, though only a very slight uptick in activity is expected. Finally, to round out the day, at 09:55 EDT / 13:55 GMT, the USD U. of Michigan Consumer Confidence (SEP P) survey will be released, and a slight downturn in confidence is anticipated.

TECHNICAL OUTLOOK

BB represents Bollinger Bands ®

EURUSD: The EURUSD continues to impress, breaking through its 61.8% Fibonacci retracement on the February high to July low yesterday, now testing 1.3100 (!) and the 76.4% Fibonacci retracement at 1.3145. Near-term resistance lies, there and at 1.3240, 1.3265/85, and 1.3360. It is possible that a long-term bottom is now in at the 1.2040/45 low set in late-July. Interim support comes in at 1.2995/1.3005 (mid-April swing low), 1.2930/35, and 1.2820/30 (200-DMA, late-April swing high).

USDJPY: The USDJPY has rebounded today in line with a rising US 10-year Treasury Note (widening 2s10s spread). The June 1 swing low at 77.65/70 was broken yesterday leading to a washout in new lows below 77.30, something repeatedly noted over the past week as a potential occurrence. A close below 77.90 leaves open the possibility for 77.65/70 and 77.30. A close 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: The key 1.6120/40 level cracked with ease today and we’ve thus shifted our bias somewhat. A weekly close above said level opens the door for a move towards 1.6400 in the coming days. The former April swing highs at 1.6260 (by close), 1.6300 (by high) are in focus for now; 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 is threatening a breakout today, with the descending trendline off of the February 2012 and August 2012 highs coming in at 1.0560 today. Near-term resistance comes in at 1.0600/15 (August high) and 1.0630. Should we see a rally up towards 1.0600 again, another failure would market a Double Top and signal a push for a test of 1.0265 (ascending trendline off of the June 1 and September 6 lows) then 1.0200/05 (100-DMA).
— Written by Christopher Vecchio, Currency Analyst