European Central Banks Cuts 75bp to 2.50%

European Central Banks Cuts 75bp to 2.50%, Euro-Dollar (EUR/USD) Pushes Above 1.2625



The European Central Bank lowered borrowing costs the most in its 10-year history as they cut the benchmark interest rate by 75bp to 2.50% from 3.25% as the economy heads in a recession. The central bank should continue to hold a dovish outlook going forward as price pressures alleviate, which could drag on the euro over the near-term. Meanwhile, the larger-than-expect rate cut failed to trigger a drop in the euro as the EUR/USD pushed higher to hold above 1.2625, but may face increased volatility over the next few hours of trading as investors eagerly await ECB President Trichet’s press conference scheduled for 13:30 GMT.

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BoE Cuts Rates by 100bps As Expected

BoE Cuts Rates by 100bps As Expected But Signal More Action To Come As Credit Conditions Remain Difficult

The Bank of England cut their benchmark rate by 100 bps as was expected by economist bringing it to 2.00%. The Pound traded higher on the news reversing earlier losses as traders started to expect a more aggressive move given the dour fundamental data that has recently crossed the wires.


Talking Points
• Japanese Yen: Finds Support at 92.50
• Pound: BoE Cuts Rates By 100 bps
• Euro: Rate Decision Ahead
• US Dollar: Jabs Data On Tap

BoE Cuts Rates by 100bps As Expected But Signal More Action To Come As Credit Conditions Remain Difficult.

The Bank of England cut their benchmark rate by 100 bps as was expected by economist bringing it to 2.00%. The Pound traded higher on the news reversing earlier losses as traders started to expect a more aggressive move given the dour fundamental data that has recently crossed the wires. The release of the HBOS home price indicator showed that values drop another 2.6% in November which sent the pound below 1.4500 for the first time in over six years. Credit conditions remain tight which has kept the housing market from bottoming which has forced the central bank to take more measures to provide liquidity to the market.

The BoE in its post announcement remarks stated that its “unlikely that normal lending volume restored without action” as “money, credit market conditions extremely difficult”. The central bank said the consumer spending and business investment has stalled which has dragged the economy into a recession. The MPC expects inflation is likely top drop further with the possibility of it falling below its 2% target very likely. The comments signal that the central bank is not done taking action and more easing is very likely in the near-term which could lead the pound lower as markets digest the comments.

The Euro traded heavy in early trading falling to as low as 1.2549 before finding support. The Riksbank unexpected 175 bps rate cut led to the Euro dropping as speculation increased that the ECB would cut rates deeper than expected at today’s rate decision. The Swedish bank wasn’t scheduled to make a policy decision until December 17th and the preemptive move demonstrates how dire the circumstances are in Europe. The ECB is expected to cut rates by 50 bps at 12:45 GMT, but the possibility of a deeper cut has significantly increased. Indeed, the second reading of GDP for the third quarter remained at -0.2% confirming the region’s economy is in a technical recession and the lower revision of household consumption demonstrates the lack of confidence by the consumer. A more aggressive move could sink the Euro below support at 1.2330, the October 28th low with 1.2000 a possibility. However, if the central bank meets expectations and President Trichet demonstrates no intention to deviate from the MPC’s measured approach then we could see a bullish reaction with a break above 1.3000 a possibility.

The majority of the event risk for the dollar may hinge on the markets interpretation of the actions from the European central banks. The continued easing could brighten the outlook for the global economy sparking risk appetite and leading to dollar weakness. However, employment data may dampen demand for risk as jobless claims are expected to remain above 500,000 for the fourth week in a row. U.S. factory orders are expected to have fallen 4.5% in October adding to the evidence the frozen credit markets brought manufacturing activity to a halt. Despite the fundamental data headlines that GM and Chrysler are considering pre-arranged bankruptcy could have a major impact on risk appetite. The potential impact on the U.S. economy of two of the three major U.S. automakers falling into bankruptcy could send traders to the sidelines. However, the potential resolution to Detroit’s troubles could bring relief to traders, who dislike the unknown and spark bullish sentiment.

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British Pound Technical Outlook

Looking in at the hourly chart, the GBPUSD rally from 1.4554 is clearly corrective. While this could be the beginning of a flat or triangle, it may also be a completed correction at 1.5539 that will lead to new lows. Further, the decline from 1.5539 counts well as an impulse.

A rally back to former resistance at 1.5073 would potentially complete wave ii within the bear cycle from 1.5539. 1.52 is the 61.8% of the decline from 1.5539. This scenario fits well with a EURUSD rally in wave e before resumption of weakness.


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Euro Technical Outlook

I am sticking with the triangle pattern. Triangles consist of 5 waves, a-b-c-d-e.

If a triangle is underway, then wave e is underway now (possibly complete at 1.2772) and will end as a spike above 1.2772. Resistance begins at 1.28 and extends as high as 1.30. Rallies into this zone should be sold.

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People are introduced to the exciting world of foreign exchange in many ways: friends, current events, newspapers, television, and many others. For those of you who are new to forex, the following guidelines cover the basics of currency trading.

A Range Trade Opportunity Presents Itself In A USDCAD Trend Channel

Range trades do not necessary have to be pulled from perfectly horizontal periods of congestion. Directional trend channels can be just as distinct and come with less breakout pressure thanks to their bullish or bearish bias. The USDCAD channel that has developed is particularly appealing.

Why Would USDCAD Stay in a Range? · Levels to Watch: -Range Top: 1.2575 (Trend, Fib) -Range Bottom: 1.2300 (Trend, Fibs) · After a couple of months of incredible volatility, USDCAD price action has settled back into a comfortable period of congestion. However, this stability is only six sessions old; so our expectations are reserved. Risk sentiment seems to be less of a driver for this pair (considering the tame dollar price action through yesterday); but scheduled data could be an issue. There are a few releases that are concerning, but Friday’s job numbers will be key. · Congestion underlying USDCAD price action is not the traditional, horizontal range we usually follow. A clear ascending trend channel sets moving targets. Resistance is primarily found in the top of the rising trend channel, which may find confirmation in a notable Fib level. Support can be found at 1.23 as a hard level, but the channel will likely pull that higher. Suggested Strategy · Short: Half-size orders set below the channel top at 1.2550 if the daily bar close below 1.2575. · Stop: An initial stop at 1.2615 is set purposely close to prevent a major loss on a breakout. To secure profit, move the stop on the second lot to breakeven when the first target hits. · Target: The first objective equals risk (65) at 1.2485. The second target will be 1.2420.

Trading Tip – Range trades do not necessary have to be pulled from perfectly horizontal periods of congestion. Directional trend channels can be just as distinct and come with less breakout pressure thanks to their bullish or bearish bias. The USDCAD channel that has developed is particularly appealing. The ascending pattern is on a shorter time frame, has developed enough volatility to enter a trade and book profit in a relatively short time, and a breakout from the current spot price would come with plenty of warning. However, our suggested strategy does counter the dominant trend; so we have halved our order size. What’s more, though a reversal from the channel bottom would represent an even more appealing setup, we will defer any orders for a long position until spot nears this boundary to ensure price action would develop favorably. Our current strategy much come with a few limitations. We will only consider a short should USDCAD close the day within the channel boundaries. What’s more, all open order will be removed by Friday’s double labor report release.

Event Risk US And Canada

US – The US docket grows more intense as the week matures. However, the next piece of significant event risk is not due until Wednesday (potentially clearing the way for lower volatility until we are entered on our position). The combination of the ISM service sector report and the Fed’s Beige Book will give a good leading/lagging gauge on the US economies health. Market participants will be more interested in speculating on the eventual turn in the economy rather than interest rates at this point with the benchmark yielding only 100 basis points. Friday is key to the fundamental week. The non-farm payroll report is expected to report a massive loss of jobs through the past month (325,000 according to the Bloomberg consensus). This would be a discouraging number even if the market is pricing in a particularly harsh recession going forward.

Canada – Event risk from the Canadian docket could be potentially more market moving than the listings on the US docket. Through the rest of this week, we have two known market movers. Thursday’s Ivey PMI has proven itself to be an influential report in the past as a good gauge of business activity in the Canadian economy, which is then factored in as a growth report. However, with the market’s interests shifting, its impact this time around is questionable. The employment change will almost certainly hold a straightforward influence over price action. Used as an easy to read gauge of growth, this indicator will be measured against the US NFP reading to further leverage its impact. Any open orders will be immune to this risk, but live positions will still be threatened. And, if we are still in a position through the weekend, the following Tuesday’s BoC rate decision will almost certainly trigger another spurt of volatility.

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New Zealand Dollar Technical Outlook

There is quintuple divergence with RSI on the daily NZDUSD chart, which warns of a reversal.

Last Friday’s inside day reinforces the potential reversal to the upside. Staying above .5186 keeps the short term trend bullish.

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Trading the Reserve Bank of New Zealand's Rate Decision

NZD/USD:

October 2008 Reserve Bank of New Zealand Rate Decision

The RBNZ lowered the benchmark interest rate by 100bp to 6.50% from 7.50% – the largest reduction since the central bank began using the official cash rate in 1999. The extraordinary efforts taken on by Governor Alan Bollard suggests that economic conditions are deteriorating at a rapid pace as the economy slipped into a recession during the first half of the year, and policymakers may ease policy further over the coming months as growth prospects deteriorate. Dr. Bollard stated that ‘economic activity will be further constrained by these international developments,’ and went onto say that the central bank will ‘lower the rate further’ as price pressures alleviate. Falling oil prices have clearly helped to taper the upside risks for inflation, which could lead the RBNZ to hold a dovish outlook throughout the next year.

September 2008 Reserve Bank of New Zealand Rate Decision

The Reserve Bank of New Zealand lowered the benchmark interest rate to 7.50% from 8.00% despite expectations for a 25bp cut. Governor Alan Bollard reduced the cash rate by 50bp for the first time since the 2001 as the economy slipped into a recession during the first half of the year, citing that the bank is now ‘in a loosening mode.’ The downturn in the economy paired with fading demands from the global economy has led the central bank to push inflationary concerns to the backburner even as consumer price inflation reached 5.1% in the third quarter, which is higher than the 4.9% forecast anticipated by the central bank. Despite the uptick in prices, Dr. Bollard expects inflation to moderate over the next few quarters on the back of falling energy prices, and he may continue to hold a dovish outlook as concerns of a global recession intensify.

July 2008 Reserve Bank of New Zealand Rate Decision

The New Zealand central bank reduced its cash rate for the first time in five years by 25bp to 8.00%. The downturn in the housing and financial sector paired with a 0.3% contraction in second quarter GDP continues to fuel recessionary concerns for the economy. RBNZ Governor Alan Bollard stated that ‘economic activity is likely to remain weak over the reminder of 2008,’ and went onto say that the central bank would ‘lower rates further’ if the inflation outlook continues to improve. Dr. Bollard also noted that ‘unpleasant international news has emerged since the June statement and there is a risk that the domestic economy will slow further,’ fueling bearish sentiment for the New Zealand dollar. As a result, the Kiwi plunged after the release, generating a short position with a gain of 25bp.

How To Trade This Event Risk

The New Zealand dollar may face increased selling pressures over the next 24 hours of trading as the RBNZ is widely expected to lower the benchmark interest rate by 150bp to 5.00% from 6.50%. A Bloomberg News survey showed that 10 of the 17 economists polled expect the central bank to lower the key rate to 5.00%, whereas the remaining 7 economists forecast a 100bp cut to 5.50%. The downturn in the global economy paired with weakening demands for exports has clearly taken a toll on firms as business confidence fell to its lowest level in November since recordkeeping began in 1988, and conditions may only get worse as companies continue to scale back on production and employment. The New Zealand manufacturing index contracted for six consecutive months to reach a record low reading of 43.5 from 46.7 in September, while the unemployment rate surged to a five year high of 4.2% from 3.9% in the second quarter. Fading employment opportunities will continue to drag on growth despite the significant fall in energy costs as domestic demands waver. Retail spending fell 0.9% in the third quarter, followed by a 1.4% decline in the previous quarter, and may lead the Reserve Bank of New Zealand to ease policy further as price pressures alleviate. Falling oil prices have certainly helped to taper the upside risks for inflation, which should allow policymakers to hold a dovish outlook going forward. Moreover, RBNZ Governor Alan Bollard stated that he expects economic activity to remain subdued as growth prospects for the global economy deteriorates, and went on to say that ‘we would expect to lower the rate further’ as the outlook for inflation falls within the central bank’s 2% target for inflation. Policymakers expect headline reading for inflation to fall to 2.7% over the next two years as the economy contracts at a record pace, which could lead the reserve bank to ease policy well into the next year as the outlook for growth remains bleak.

Trading the given event risk may not be as clear cut as some of our other trades as market participants expect the RBNZ to aggressively lower borrowing costs over the near-term, so we would need to see a drastic shift in policy to consider a bullish outlook for the Australian dollar. Therefore, a rate reduction of less than 100bp paired with a neutral outlook for future policy would set the stage for a long NZDUSD trade, and we will look for a green, five minute candle following the release to confirm a long trade on two lots of the kiwi-dollar. Our initial stop will be placed at the nearby swing low (or reasonable distance), and this risk will determine our first target. Our second target will be based purely on discretion, and in order to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.

Nevertheless, deteriorating fundamentals paired with the drastic slowdown in the economy is likely to push the RBNZ to loosen monetary policy even further in order to ward off the downside risks to growth, and may continue to lower borrowing costs next year as the economy faces its worst recession in nearly a decade. As a result, dovish commentary following a 150+bp rate cut would favor a bearish outlook for the kiwi-dollar, and we will follow the same strategy as the long positions described above, just in reverse.

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