Risk assets remained supported through the New York session as the optimism created by the EU Summit meeting keeps markets elevated and news headlines continue to discuss the possibility of additional purchases of European debt by the Chinese government. US macro data was also higher than expectations so traders who are long equities had little reason to close out their positions.
The EUR/USD holds steady, another leg higher at 1.4150-1.4250 while the USD/JPY is heavy at 75.80-76.10. Stock markets had a strong performance yesterday, with the S&P 500 showing a close 3.4% higher, while the CAC and DAX performing even better with gains of 6% and 5%, respectively. US macro data was seen with the third quarter GDP release, which came in at 2.5% for the yearly figures and jobless claims matching market expectations.
The French President (Sarkozy) made comments, re-iterating the importance of the steps taken at Wednesday’s meeting and suggested that any severe devaluation of the Euro would be detrimental for the continent. In addition to this, he said that France’s official GDP forecast is now seen lower, at 1% (from 1.75% previously) and that a new set of austerity measures will be implemented and reduce government spending by 6-8 billion Euros. In other Euro-area news. S&P lowered the credit rating of Cyprus (to BBB) with a negative long term outlook.
In currency markets, the sum effect of this week’s meetings has led to heavy selling in the US Dollar, which is relatively surprising given the price activity that is being seen in the Yen. Market reaction to the EU results has been largely risk positive, with the only major exception being seen in the USD/JPY, which continues to grind lower.
Since this is generally not what market analysts would expect, the Bank of Japan is likely to become increasingly concerned (as this year’s trend in Yen strength refuses to show any meaningful reversal). Given this, risk of intervention is rising and the potential volatility in the USD/JPY could change without warning. Last night, there were no official comments in line with this possibility but short positions in this pair should be viewed in light of this potential outcome.
In Sweden, the Riksbank kept rates steady at 2% during its policy meeting (with two dissenting votes), and downgraded both its GDP and CPI forecasts. The 2011 figures are now seen at 4.2% in GDP and 1.9% for consumer inflation.
The AUD/JPY has bounced strongly off of weekly support at 72. This area is now a clear double bottom and suggests we will see a retest of resistance at 90. Hourly charts are showing lower highs, however, so we will see to see a break of Fib resistance and the downtrend line in order to open up the highs at 90.
The DAX continues its recent rally and is now testing resistance at the 200 day EMA. This area is relatively close to the 61.8% daily Fib level, so risk to reward favors short positions relatively soon. First support comes in at 6365.