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Mid-Day Report: Risk Rally Extends after Italian Auction, Dollar Selloff Continues

January 26th, 2012 | Add a Comment

Dollar’s broad based decline continues today on strong risk appetite. European equities are generally boosted by Fed’s low interest rate pledge. Successful Italian auction adds more fuel to risk rally. Italy sold maximum amount of EUR 5b of short-term bonds in the first auction after SP downgraded the country’s rating by two notches. Italy sold EUR 4.5b of January 2014 CTZ bonds and EUR 0.5 b of off-the-run September 2014 bonds. Yield on the two-year zero coupon bonds dropped to 3.76%, lowest since August. 10 year benchmark yield dropped further away from 7% level to 6.09% while five year CDS dropped to 410bps.

In addition, there are reports that Greece private bond holders are willing to improve the so called “maximum” offer and would agree to a 4% interest rate on the swapped Greek bonds. However, that’s not confirmed yet. And time is running out ahead of the major bond redemption deadline in March. Another major focus is now ECB would eventually be involved in the deal. It’s also reported that ECB has ruled out taking losses on Greek bond holdings voluntarily. It’s estimated that ECB is holding around EUR 40-50b of Greek bonds and argued that it should be treated differently from private investors as the bonds are purchased through the emergency program. Also, there are speculations that ECB’s Greek would be passed to the bailout funds. IIF head Dallara is in Athens to continue the negotiation with Greek officials.

On the data front, US headline durable goods orders rose more than expected by 3.7% in December while ex-transport orders also rose 2.7%. Initial jobless claim rebounded more than expected to 377k. German Gfk consumer sentiment improved to 5.9 in February. UK CBI reported sales dropped to -22 in January. Japan corporate service price index rose 0.1% yoy in December.

At today’s meeting, the RBNZ left the OCR unchanged at 2.5% and signaled that the pause might be longer than previously anticipated. Despite the seemingly more dovish statement, policymakers saw some improvements in household spending and the housing market. Policymakers believed it’s prudent to keep the OCR on hold at 2.5% but the words ‘for now’ were removed in the statement this time. This probably signals that interest rates will stay at current level longer than previously expected. More in RBNZ Intends To Pause Longer

The Fed delivered a dovish policy statement yesterday, stating the Fed funds rate will stay at exceptionally low level ‘at least through late 2014′. There were two other notable changes made at the meeting. First, the Fed released interest rate projections of participants. Second, the central bank released a statement on its longer-run goals and strategy, indicating a 2% long-run target for the PCE deflator. The dovish tone of the statement and the press conference was a reflection of the highly uncertain global economic outlook which was supported by FOMC’s downward revision in growth forecast over the next three years. We retain the view that the Fed will implement QE3 in the second half of this year, after completion of operation twist. More in Fed Keeps Interests Low At Least Until Late 2014.

Also, more on Fed:

Daily Pivots: (S1) 1.2983; (P) 1.3052 (R1) 1.3173; More.

EUR/USD rises further to as high as 1.3174 so far in early US session and intraday bias remains on the upside for 38.2% retracement of 1.4246 to 1.2625 at 1.3244. The persistent strength above 55 days EMA so far argues that fall from 1.4246 is over at 1.2625. Sustained trading above 1.3244 will target next fibo level at 61.8% retracement at 1.3267. On the downside, break of 1.2931 minor support will flip bias back to the downside for retesting 1.2625 low instead.

In the bigger picture, price actions from 1.6039 are unfolding as a consolidation pattern in the long term and is in progress. Fall from 1.4939 is a falling leg inside the pattern. It’s hard to anticipate the length of a leg of any complex corrective pattern. Also, price actions would likely remain choppy and indecisive with misleading momentum indicator readings. . But after all, overall picture still favors deeper fall to 1.1875 support before the consolidation pattern completes. Though, sustained trading above 55 weeks EMA (now at 1.3679) will pave the way for a test on 1.4939 resistance level.