As we saw with the quad witching last Friday, end of period book
rebalancing can throw markets off their normal course and produce some
rather interesting price action. Today is no different, with the final
day of September and the third quarter upon us. As such, the major
currencies that typically trade with one another – the British Pound and
the Euro, the Australian and New Zealand Dollars – have diverged
slightly against the US Dollar as investors reshuffle their holdings;
today’s price action may not be an accurate gauge of attitudes towards
the market (just because prices have diverged doesn’t mean that
historical correlations don’t remain important).
Although the US Dollar is slightly stronger today, we must respect
yesterday’s price action as an insight as to what the market is
expecting from Europe. Yesterday, the Spanish government announced its
2013 budget with the introduction of 43 news laws, a new independent
fiscal authority, and sweeping spending cuts to try and reign in the
deficit. But the big news isn’t that the public pension fund is being
raided to help cover the deficit; instead, it is what pan-European
authorities will do.
At the press conference, the Spanish Deputy Prime Minister explicitly
expressed that the budget measures proposed went well-beyond the scope
of leaders in Brussels and Luxembourg. Why does this matter? For Spain
to take part in the European Central Bank’s bond-buying program, the
OMTs, it would have to agree to reforms onset by foreigners. If the
Spanish government made budget cuts beyond what would be expected by the
European Troika, we can draw two conclusions: the Spanish government is
preparing for a bailout; and it is trying to save face to make it look
like outsiders aren’t influencing domestic politics. Rumors have been
floating that Spain will ask for a sovereign bailout around October 4,
so as to ensure that it can access the OMTs. Coupled with the
aforementioned budget cuts, one can’t help but look to the European
Stability Mechanism (ESM) coming online on October 8 as the next big
milestone for the debt crisis.
Taking a look at credit, peripheral European bond yields are higher
on the day. The Italian 2-year note yield has increased to 2.385%
(+8.4-bps) while the Spanish 2-year note yield has increased to 3.304%
(+6.8-bps). Likewise, the Italian 10-year note yield has increased to
5.148% (+5.3-bps) while the Spanish 10-year note yield has increased to
5.975% (+10.0-bps); higher yields imply low prices.
RELATIVE PERFORMANCE (versus USD): 10:52 GMT
CHF: +0.24%
EUR:+0.18%
NZD:+0.05%
JPY:-0.03%
CAD:-0.03%
AUD:-0.08%
GBP: -0.22%
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.04% (-0.06% past 5-days)
ECONOMIC CALENDAR
The week finishes with several pieces of important data, all coming
within the hour before or after the US cash equity open. At 08:30 EDT /
12:30 GMT, the CAD Gross Domestic Product (JUL) will be released, and
only modest growth is forecasted; though with the growth rates
well-above her American and European counterparts, the Canadian economy
looks well off.
Also due then are the USD Personal Income (AUG) and USD Personal
Spending (AUG) figures, which necessarily suggest (given the negative
divergence between income and spending) that American consumers are
taking on more debt to finance their expenditures. This isn’t a surprise
given the fact that wages adjusted for inflation have been falling
(reducing purchasing power), although if it continues for a prolonged
period of time, a new credit bubble could be forming. One of the key
gauges the Federal Reserve watches for inflation – the USD Personal
Consumption Expenditure Core (AUG) – will also be released today.
Rounding out the key data for the day is final USD U. of Michigan
Confidence (SEP F) report, which is due to show a slight downward
revision. The initial September reading showed that confidence soared to
its highest reading since May, but had since pulled back on renewed
concerns over the labor market.
TECHNICAL OUTLOOK
EURUSD: The bounce at the 200-DMA yesterday was to
be expected, considering it was the first major level of downside
support. Now the EURUSD must figure out if its correction is over or
this was just an ideal opportunity to take profits on short positions.
The pair is testing the 61.8% Fibo retracement (February 2012 high to
the July 2012 low) at 1.2934 again, though a rejection would suggest a
move towards the mid-1.2800s again. Near-term support comes in at 1.2920
(5-EMA) and 1.2820/55 (20-EMA, 200-DMA, late-April swing high). Interim
resistance lies at 1.2930/35, 1.3000, 1.3145, and 1.3165/75 (September
high).
USDJPY: Nothing has changed from yesterday: “Price
hovers near the key 77.65/70 level, a major level of support considering
it was the June 1 swing low that held for three-months. A daily close
above this level eyes resistance at 77.90, 78.10/20, 78.60, 78.90/95
(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
77.65/70, support comes in at 77.45/50, and 77.10/15 (September low).”
GBPUSD: The GBPUSD has been stuck in a tight
consolidation the past two-weeks, leaving our levels unchanged from
yesterday. “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 1.6095/1.6100 (20-EMA), 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 Falling Wedge – a reversal pattern –
off the September 14 high broke to the upside yesterday, triggering a
run up to the 1.0470s before the pair has pulled back today. With the
pattern now initiated, a test of the September highs comes into focus
early next week. Near-term resistance comes in at 1.0470/85 (daily high,
former intraday swing levels). Interim support comes in at 1.0415/25
(20-EMA, mid-August swing lows, Falling Wedge breakout level), 1.0370/85
(descending trendline off of the August 9 and August 23 highs, 50-EMA),
and 1.0325/40.
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