Mid-Day Report: Euro Steady after ECB Holds Rates, Extends Loan Offerings, Raises Forecasts

By: Milla Shaw in Forex Consultant on Sep. 1, 2010

Euro remains steady as ECB left rates unchanged at 1.00% and said it will extend its unlimited loan offerings into 2011. That include seven-day and one-month funding at fixed rates until at least January, as well as three-month loans in October, November and December. In addition, ECB raised growth forecasts for 2010 from 1.0% to 1.6%. Growth projection for 2011 was raised from 1.2% to 1.4%. Inflation is expected to be 1.5-1.7% in 2010 and 1.2-2.2% in 2011. Trichet noted that “current monetary policy stance remains accommodative” and that’s necessary to “fostering sustainable economic growth, job creation and financial stability.”

Elsewhere, EU plans to limit naked short selling of shares and government debts to avoid “disorderly market and possible systemic risks.” EU’s proposal require short selling to “ensure that the security can be borrowed so that settlement can be effected.” EU expects the new rules will “significant exposures in credit default swaps that relate to EU sovereign debt issuers”

On the data front, US jobless claims improved slightly to 472k but remains elevated. Q2 non-farm productivity was revised down to -1.8%, unit labor cost revised down to 1.1%. Eurozone Q2 GDP was revised up to 1.9% yoy. PPI rose 0.2% mom, 4.0% yoy in July. UK PMI construction dropped more than expected to 52.1 in August. Swiss data were strong. Q2 GDP rose 0.9% qoq, 3.4% yoy versus consensus of 0.8% qoq, 2.6% yoy. Retail sales rose 4.8% yoy in July comparing to consensus of 2.3%. Australian trade surplus shrank sharply to AUD 1.89b in July.

GBP/CHF continues to be the weakest pair this week and is down over -2.5%, on comparative weakness in Sterling and the broad based strength in Swissy. We’re staying bearish in GBP/CHF as long as 1.6030 resistance holds and expect a test on 2008 low of 1.5111 next.

GBP/AUD’s break of 1.7050 support this week also confirms that whole fall from 1.8140 has resumed. The development suggests that corrective rebound from 1.6218 is finished with three waves up to 1.8140. Further break of 1.6745 support will confirm this bearish case and target a test on 2010 low of 1.6218 next.

Daily Pivots: (S1) 1.0087; (P) 1.0134; (R1) 1.0204; More.

Intraday bias in USD/CHF remains neutral and consolidations from 1.0064 might continue further. Though, short term outlook remains bearish with 1.0330 support turned resistance intact and recent decline is still expected to continue. Below 1.0064 will target parity next. Note that we’d anticipate strong support at around parity to contain downside, at least initially. However, sustained trading below parity will pave the way to 0.9916 key support level.

In the bigger picture, USD/CHF is possibly in the process of forming a medium term sideway pattern that started at the long term bottom of 0.9634 (2008 low). The pair will continue to stay in converging range of 0.9634/1.2296 for a while. A break of either 0.9916 support or 1.1729 resistance is needed to indicate that USD/CHF is back into a directional trend. Otherwise, medium term outlook will remain neutral.

GMT Ccy Events Actual Consensus Previous Revised

23:50 JPY Monetary Base Y/Y Aug 5.40% 6.30% 6.10% 01:30 AUD Trade Balance (AUD) Jul 1.89B 3.11B 3.54B 3.44B 05:45 CHF GDP Q/Q Q2 0.90% 0.80% 0.40% 05:45 CHF GDP Y/Y Q2 3.40% 2.60% 2.20% 07:15 CHF Retail Sales (Real) Y/Y Jul 4.80% 2.30% 1.00% 08:30 GBP PMI Construction Aug 52.1 53.9 54.1 09:00 EUR Eurozone PPI M/M Jul 0.20% 0.30% 0.30% 09:00 EUR Eurozone PPI Y/Y Jul 4.00% 3.90% 3.00% 09:00 EUR Eurozone GDP Q/Q Q2 P 1.00% 1.00% 1.00% 0.30% 09:00 EUR Eurozone GDP Y/Y Q2 P 1.90% 1.70% 1.70% 0.80% 11:45 EUR ECB Interest Rate Decision 1.00% 1.00% 1.00% 12:30 EUR ECB Press Conference — — 12:30 USD Non-Farm Productivity Q2 F -1.80% -2.00% -0.90% 12:30 USD Unit Labor Costs Q2 F 1.10% 1.40% 0.20% 12:30 USD Initial Jobless Claims 472K 478K 473K 14:00 USD Pending Home Sales M/M Jul -1.50% -2.60% 14:00 USD Factory Orders Jul 0.50% -1.20%

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