Yesterday’s reluctance by the ECB to be more accommodative in terms of monetary policy can be partly explained by the continued fall in Spanish and Italian bond yields as well as the slight bottoming out seen in some of last week’s European PMI data, particularly on the services side.
Today’s 3 and 5 year Italian bond auctions of up to €5bn is likely to follow on from yesterday’s successful 12 month auction which saw yields fall to their lowest levels since January 2010.
Even on the longer end yields fell to their lowest levels in nearly two years below 4.2% on the 10 year Italian bond yesterday. For now the “Draghi Put” is keeping investors and markets on-side, as can be seen by the narrowing of the BTP/Bund spread to its narrowest levels since mid-2011, at 260 points, with the potential to narrow even further, as yields converge.
ECB President Draghi was at pains to suggest that it was far too early to declare victory with respect to the crisis, but the manner of his tone suggested that a rate cut was unlikely to occur in the near term, despite continually rising levels of unemployment, which he declared was outside of the central banks mandate.
This less dovish tone has caused the euro to surge to 18 month highs against the yen and back close to its December highs against the US dollar. The move in the yen was particularly sharp due to a Nikkei report that suggested that the Bank of Japan could be asked to target unemployment. The new Japanese government also announced a new economic stimulus package to the tune of 10.3trn yen.
Draghi’s talk of financial market “normalisation” also appears to have emboldened investors into moving back into equity markets given the more benign environment currently in Europe; however the move only appears to be only happening gradually.
Nevertheless European markets look set to continue their positive tone with the FTSE set to open at its highest level since May 2008, above the 6,100 level.
In the UK the Bank of England also kept monetary policy unchanged yesterday despite recent weaker economic data. Today we should see an improvement in both the November industrial production and manufacturing production numbers with month on month gains of 0.8% and 0.5% respectively, with recent PMI data also suggesting that the recovery continued into December.
In the US the latest trade numbers for November are expected to improve slightly coming in at -$41.1bn from October’s -$42.2bn, which could suggest that US Q4 GDP may not have taken as big a hit from Hurricane Sandy as first thought.
EURUSD – yesterday’s strong break above the 1.3170 level has brought us back to the key 1.3300 resistance area which remains the main obstacle for a move towards 1.3500.
The long term support line from the 1.2045 lows now at 1.2995 remains the key level on the downside while a move below 1.2950 targets the 100 day MA at 1.2935 and below that the 200 day MA at 1.2780.
GBPUSD – also range trading between resistance near the 1.6180 level and support just above 1.6000. To retarget the resistance at 1.6310 the cable needs to get above 1.6180. A break below the 1.6000 level is needed to target major trend line support now at 1.5960 from the 1.5270 lows, the 200 day MA at 1.5900, as well as 1.5660.
EURGBP – yesterday’s move through the 0.8170 level, now targets a retest the December highs at 0.8225, a break of which targets the 0.8265 level.
The long term trend line support at 0.8075 from the 0.7755 lows remains a key level, a break of which could well signal further losses towards the November lows at 0.7960.
USDJPY – the current rebound not only saw the US dollar pull back to the previous 88.40 high, but it ripped straight through it, keeping the move towards the 90.00 area on target.
Pullbacks are likely to continue to find support at 87.50 as well as this week’s low at 86.80.