The US Dollar dropped by the most in nearly a year after the US Federal Reserve announced its plans to enact its third monetary stimulus program (quantitative easing in the form of mortgage backed securities purchases). In currencies markets, the primary beneficiaries of the announcement could be seen in the Euro and high yielding currencies (such as the Australian and New Zealand Dollar), as investors look to move back into carry trades and long term positions that reflect a more stable and progressive market environment. Additionally, plans for quantitative easing are expected to add to inflationary pressures in the US (essentially, devaluing the US Dollar) and bringing a negative outlook to the currency for the remainder of the year.
The Euro has now posted a clearly defined reversal, to trade comfortably back into the 1.31 area. Adding to the positive sentiment, relative to the Euro, was last week’s decision by the constitutional government legal body in Germany, which halted plans to delay proposals for additional bailout disbursements (aid to debt troubled European nations). Given that Eurozone bailout programs are unlikely to see further delays in the near term, analysts will now begin to forecast brighter GDP performances for countries like Spain, Portugal, Greece and Italy. Since this will essentially mean that arguments suggesting a breakup of the European Monetary Union (EMU) will dissappear, for the most part, the Euro is likely to regain some of the ground it lost in most of this year’s trading.
Intervention Prospects in Japan and Switzerland Take Central Focus in Currency Markets
With the weakness in the US Dollar last week, currency pairs such as the USD/JPY reached levels that were viewed as being uncomfortably low by some of th relevant central banks. This strength in the Japanese Yen is thought to be unfavorable for the country’s trade balance and export prospects and because of this, the Bank of Japan (BoJ) released comments that it is prepared to sell its own currency in high volumes in order to prevent further strength (weakness in the USD/JPY).
The other major story last week came with the EUR/CHF currency pair, which rose to its highest levels since January 6th. For most of this year, the pair has traded near the 1.20 level, which is where the Swiss National Bank (SNB) has intervened to prevent further appreciation. The EUR/CHF hit highs of 1.2175 last week, in some of the most volatile trading moves the pair has seen all year.
The EUR/USD has now convinvingly broken out of its long term downtrend channel and this suggests that the bottom for the year is now in place at 1.2040. Overall, the technical structure remains constructive as long as the 1.2750 area holds and the preferred strategy is now to buy on any signs of weakness into the end of the year. Looking ahead, the next level of resistance comes in at 1.3280, which is a historical level as well as the 100 day EMA and the upper Bollinger Band.