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Coordinated CB action to facilitate USD funding hit the US currency

Coordinated CB action to facilitate USD funding hit the US currency

1.12.2011 9:51

In a coordinated action between Fed, ECB, BoE, BOJ, SNB and Bank of Canada, central banks addressed the pressures in global money markets by lowering the pricing on the existing temporary USD liquidity swap arrangements by 50 bps. The new rate will be USD Overnight Index Swap (OIS) plus 50 bps (instead of plus 100 bps). The swap arrangements are extended to February 1 2013 (both for week and 3-month operations). To make the operations still more interesting ECB margin requirements for 3-month operations were cut from 20% to 12%. Central Banks agreed that similar reciprocal swap lines might be offered in other currencies than USD if it would become necessary. Central banks thought it was prudent to prepare for such an eventuality. In a separate, autonomous decision, the Chinese Central Bank lowered the reserve requirement of banks by 50 bps.

The EUR/USD spiked higher by almost 2 big figures, filling offers in the 1.35 area. And, this coordinated action was even not the last surprise yesterday as the ADP labour market report came out much stronger than expected (this was also the case for the Chicago PMI and the pending home sales). However, after leaping higher in the wake of the CB action, the eco data failed to give risk and EUR/USD an additional boost. EUR/USD settled in the mid 1.34 area. The pair closed the session at 1.3446, compared to 1.3317 on Tuesday evening.

Later today, the calendar contains again several interesting data and events. In Europe, the final manufacturing PMI’s for November will be published. Markets will keep a close eye on the data from the peripheral countries. A further sharp deterioration in activity in these countries might be a negative for the single currency. Currency traders will also keep an eye on the Spanish and French bond auctions. Of late countries like Italy mostly succeeded to sale the planned amount of bonds, but at a high yield. The market reaction was cautiously positive. Early this morning, ECB’s Draghi will also present the annual ECB report at the European parliament.

Later in the session, Sarkozy speaks on the economy and on the crisis. Will he already unveil some details on the political compromise that is expected to be reached at next week’s EU summit? In general, we don’t expect the news from Europe to provide a big support for the single currency today. In the US, markets will look out for the initial jobless claims, the vehicle sales and the ISM of the manufacturing sector. Markets will be keen to see whether the recent improvement in eco data can be continued. If so, it might be supportive for risk and as such it could also give the euro some downside protection. However, after yesterday’s rebound, we assume that the topside in EUR/USD has become quite difficult.

Looking at the technical picture, end-October the pair regained temporary the ‘old’ sideways trading pattern roughly between 1.40 and 1.4550. However, the Japanese interventions and a new escalation of the EMU debt crisis again overthrew this improvement in the technical picture. From there, the pair lost gradually ground and dropped below the 1.3655/08 support area. The technical picture deteriorated and the pair set consecutive new short-term lows. On Friday, the pair set a new (interim?) low at
1.3212. Yesterday’s spike makes the ST picture less heavy, but it doesn’t mark a big chance in sentiment yet. The 1.3533 (spike) is now the first point of reference. Sustained trading above the 1.3653 area (Neckline H&S) is still need to call of the ST alert in this cross rate. On the downside, the 1.3212/1.3145 area is the first line in the sand before the 1.30 area comes in the picture. We maintain our EUR/USD negative bias and look for a technical rebound to (re-install) add EUR/USD short exposure.

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