A new lie in the name of speculations

Again, China was the main theme of discussions at the preparatory meeting for G20 summit
The market was simply in need of American weekend in order to calm down after the last week's commotion. Draghi made a gift to the market in the form of drop of euro by more than a figure, and NFP, again, did not add any clarity. Today, the market is coming back. A great master class of informational blackmail: Draghi produced a statement that the ECB asset purchase program is going as planned (euro is growing) along with the increase of the limit in purchase of one issue securities from 25% to 33% (wild sales of the same euro). However, if we are to be specific, such ECB decision will mean that Europe lacks assets for redemption of bonds in the amount of 60 bln a month. Those are regular technical problems, but the market became the victim of psychology: speculators caught hints regarding QE expansion and interpreted any new step of ECB in their favor.

Yes, ECB revised GDP predictions downwards (minus 0.5% in general for the next three years) and those of inflation (minus 0.7% for the same period) because of dramatic fluctuations on financial and commodity markets, and the probability of further movement remains. Yes, ECB recognized that the drop of oil prices will be good for economy until secondary effects appear. Yes, Greek state treasury bill are not yet accepted for pledge, and Greek banks have not been admitted to QE programs. We shouldn't wait for any positive in this area until a couple of months later. Yes, Draghi had to recognize, under the pressure of journalists, that the issue of QE program expansion has not been discussed yet. However, we shouldn't draw any conclusions regarding structural long-term negative yet. No logical statements regarding the fact that we need, in the framework of Euro-QE, to store oil to provide inflation growth followed. A search of solution for the problem of China's compliance with the G20 countries regarding prevention of competitive devaluation of currencies was declared as the main current objective for GDP and inflation growth. In reality: ECB mandate restricts purchase of a block of bonds above 25% since it will be impossible to restructure debts then. An increase of redemption limit will be allowed only in case of detailed check to make sure that such a redemption will not grant ECB a blocking stake. And that will mean that ECB has reached a maximum of redemption level at this stage, further QE expansion will be impossible without violation of mandate.

After the publication of all data on Eurozone last week that turned above predicted, all Draghi's verbal manipulations regarding euro's high rate, low prices for raw materials, and weak economy growth have no sense. Euro rate is too low without that. It is impossible to provide economy growth and inflation growth expectation in the USA in the midst of economy decline and inflation in Eurozone; therefore, someone is definitely lying - either FRS, or ECB. In order for inflation to grow, no cheap oil is needed, common stabilization of basic indicators will be enough, since in case of increase of money supply in Eurozone (under a low rate), inflation in Europe will grow faster than in the USA. A logical response - after Draghi's speech - all large analytical centers produced information that if ECB thinks the situation is critical, FRS will not be in a hurry and will delay rate increase for an indefinite period of time.

Again, China was the main theme of discussions at the preparatory meeting for G20 summit. Firstly - The Bank of China is actively manipulating its balance. Secondly - it is not clear if the calculation technique for revaluation of currency rates is used, since it could make up to USD 20 bln. China continues to sell US Treasury securities (amount - USD 94 bln. - an absolute record); however, this number can likely reach USD 115 bln. That not only reduces investors' confidence in stability, but also puts pressure on the yield of "benchmark" bonds, global liquidity, and American monetary policy. If currency reserves continue to reduce in such a rate, we should be waiting for another series of reduction of required reserve ratio (RRR rate) by the Bank of China and short-term injections of liquidity in order to keep the market from complete collapse.

However, Nonfarm Payrolls data for August turned out as favorable for FRS rate increase at its 17 September meeting. The number of created jobs in June-July was revised towards an increase up to 44K, which slightly compensated the current indicators (another lie in the name of future statistics). Unemployment fell to 5.1%, U6 indicator also dropped to 10.3% from 10.4%, salaries grew, the level of labor force participation - is the same. All the labor market references can be regarded as implemented. There are no publications of US and Eurozone's important data this week, only non-traditional indicators of FRS labor market searches on Tuesday and Wednesday. The trade balance on China (above expectations) has been worked off, we will be waiting for the date on Chinese inflation on Thursday.

We will try to look into technicalities only in euros. Euro's response to Draghi was not well-grounded; therefore, we should wait for a pullback following speculators' disappointment, which will mean a massive closure of shorts in EUR/USD. Strong mid-term support: 1.1110/1.1050. The system of market-makers' mid-term support is below: 1.0940/1.0870. A penetration is possible through a strong impact, for which there are no grounds so far. Important mid-term resistances 1.1175/1.1250/1.1290/1.1350. There is no testing of key level 1.1250 yet; however, growth attempts are possible. Then, it will be possible to sell from area 1.1240-1.1280 with a stop above 1.1320, and the goal on psychological support level 1.1000.

Until FRS 15-16 September meeting, there will be low appetite for risk. However, "Time of silence" starts one week before the meeting, that means that FRS officials will not be allowed to make any comments. Therefore, unplanned statements with hints to the destiny of the rate will be possible at G20 Summit.

Author: Alexander Ward,
ForexChief Currency strategist