The US September labor market report was certainly interesting: muddling jobs growth according to the Nonfarm Payrolls reading; explosive jobs growth according to the Household Employment survey; an increasing participation rate; and the lowest Unemployment Rate seen since early-2009. These data resulted in a stronger US Dollar, but is the data strong enough to suggest the Federal Reserve will halt QE3 sooner than expected? No.
There’s been chatter that the Fed is talking about defining what the “brakes” will be, and the proposal from Charles Evans, the Chicago Fed President, is being floated as the likely frontrunner. “The Evans Rule,” as it has been dubbed, states that QE3 – the open-ended agency mortgage-backed securities (MBS) purchase program – will remain in place until the Unemployment Rate drops to 7% or Core CPI jumps to 3% on a yearly-basis; neither of those are close to being fulfilled. Market participants seem to agree with this assessment, as the USDJPY has fallen over half of a percent, a sign that investors aren’t ready to dispose of the Yen has a preferred safe haven to the US Dollar post-NFPs.
In Europe, sentiment has slipped over the weekend, with the Euro leading lower across the board as finance ministers gather in Luxembourg. The topics of the meeting are more of the same: Greece and political instability; and Spain and a potential bailout. Our main interest is on the second point: the European Stability Mechanism (ESM) comes online today, meaning that Spain could have access to the European Central Bank’s balance sheet to help cap yields at any point in time going forward. Once Spain applies for a bailout, a major uncertainty is off the investment horizon for the coming months, likely through the end of the quarter. This should cater to further appetite for risk assets, though it’s important to consider that the Euro might not strengthen as the ECB’s balance sheet expands – a similar reaction to the second longer-term refinancing operation (LTRO) in February should be expected.
Taking a look at credit, peripheral European bond yields mixed but have been inching up the past few hours. The Italian 2-year note yield has increased to 2.197% (+6.7-bps) while the Spanish 2-year note yield has decreased to 2.961% (-1.4-bps). Likewise, the Italian 10-year note yield has increased to 5.037% (+0.5-bps) while the Spanish 10-year note yield has decreased to 5.609% (-3.7-bps); lower yields imply higher prices.
RELATIVE PERFORMANCE (versus USD): 10:53 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.03% (+0.52% past 5-days)
There are no key data releases on the docket for today, suggesting that prevailing sentiment and technical trends will continue to dictate price action for the next 24-hours.
EURUSD: The late sell-off Friday has spilled over to Monday, with a potential Evening Start candlestick cluster forming on the daily chart; this would negate our near-term bullish bias. However, considering that the EURUSD remains range bound still within prices we’ve seen over the past two-weeks, our key levels remain the same. Resistance comes in at 1.3300, 1.3070/75 (October high), 1.3145, and 1.3165/75 (September high). Support comes in at 1.2930/35 (61.8% Fibo on February 2012 high to July 2012 low), 1.2895/1.2900 (20-EMA), and 1.2820/30 (200-DMA, late-April swing high).
USDJPY:Although price breached the 78.40/60 zone, overhead resistance at 78.80/90 (100-DMA, descending trendline off of the April 20 and June 25 highs) proved too great to overcome. Thus, the downtrend from April remains. With the USDJPY holding near 78.10/20, this is the bull/bear line: a hold above gives scope for a rebound to 78.40/60, whereas a close below opens up room for a move towards 77.90, 77.65/70 (June 1 low), 77.40/45 (September 28 low), and 77.10/15 (September low).
GBPUSD: Price continues to decline and the initial bounce off of the ascending trendline off of August 2 and August 31 lows has faded. Also, with price back below the 20-EMA and the descending trendline off of April 2011 and August 2011 highs (confluence at 1.6100/20), there now appears to be a slight descending channel off of the September 21 high in place. We will respect this as our guide for the coming days. Support comes in at 1.5970/75 (former channel resistance off of June 20 and August 23 highs), and 1.5770/85 (late-August swing lows. Resistance comes in at 1.6100/20, 1.6135, 1.6260 (the former April swing highs by close) and 1.6300 /10 (September high).
AUDUSD: The pair remains lower after running into support turned resistance, at 1.0255/75 on Friday, the descending trendline off of the September 12, September 20, and September 26 lows. However, the AUDUSD remains supported by the crucial 1.0160/75 level, swing lows in mid-July and early-September. Resistance comes in at 1.0245/50 (100-DMA), 1.0255/75, 1.0330, 1.0405/25 (mid-August swing lows), and 1.0470/85 (former intraday swing levels). Support comes in at 1.0160/75 (mid-July and early-September swing levels), 1.0100/10, and 1.0000.
SPX500: Reversal on Friday resulted in a failed run at the yearly highs, and the Doji offered followed by some further downside suggests near-term price action may be biased lower. I reiterate though “Since early-August, the 20-EMA has been strong support, with no two consecutive closes below occurring. We also note that over this time frame the daily RSI has not moved below 50.” Resistance comes in at 1458/60, 1475, and 1498/1504. Support comes in at 1445/47(20-EMA), 1425 (the 61.8% Fibo retracement on June 2012 low to September 2012 high), and 1423/25 (50-EMA).
GOLD: Another rejection at the crucial 1785/1805 resistance zone prompted by Friday’s NFPs has dragged Gold back to key support: the sharp ascending trendline off of the August 15 and August 31 lows. This comes in today at 1755/60, reinforced by the 20-EMA, and former intraday swing lows throughout mid-September. If this support breaks, 1750/55 is the next swing level lower to watch for. Resistance comes in at 1785/1805 and 1840.
--- Written by Christopher Vecchio, Currency Analyst
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