In Europe without changes: ECB buys everything

Scotland published on the governmental website the bill of the second referendum on an exit from Great Britain

Week was active, but logical. Scotland asks on an exit, OPEC preferred not to tell about the prices, China sells currency to everyone with a record speed. The transit ECB meeting didn't make decisions, but the market of common currency was nervous enough.

Draghi managed to cause sharp movements, but further accurately determined the direction: let's fall. Rates and amounts of the purchasing are kept for indefinite time (or even longer), till the Central Bank won't see «steady change of inflation according to the purpose». ECB is obviously afraid of the overestimated market expectations - even hints on QE prolongation in full after March, 2017 will lead to the strong growth of euro.

What are going to buy up as «other» assets - traditionally isn't specified. If ECB in December only reports about prolongation of validity period of the program, and the QE size will declare only in March based on new estimation for inflation growth, then Draghi will have not two months of respectively weak euro, and full five. During this time both the referendum in Italy will take place, and something new concerning Brexit will appear, and in general - year will end.

Therefore both comments - minimum and foggy, and all data - within expectations, and problem subjects (for example, lack of assets for the purchasing) - were discussed, but there are no decisions, and the purchasing amounts - can be lowered, but is unclear - when and how long. All main answers were passed to a meeting in December. The disappointed investors on Friday continued dumping of common currency to the lowest level from the moment of the English referendum, so the current correction on EURUSD is necessary already.

However Scotland published on the governmental website the bill of the second referendum on an exit from Great Britain. The document contains necessary rules of holding a campaign, the organization of vote and counting of votes, but the question of repeated vote remains open so far, and the publication has advisory character.

Bank of England can allow higher inflation and further fall of pound to raise the prices in economy. Increase in prices for food will be the first signal what, first of all, the contingent with the lowest income will suffer from, but transition from lack of inflation (0,6%) to its emergence (3% until the end of the year) doesn't happen cheap.

Analysts consider fall of pound as a positive for export sector of Great Britain, but it won't improve indicators of the current account, because the current losses are a consequence of fall of investor confidence. News about changes in the legislation concerning the unconfirmed income aren't too favorable in this plan. GBP/USD slightly calmed down after the next unsuccessful attempt to break higher than 1.2330, it is possible to assume, that negative prospects of a tough divorce with the EU are already considered in the rate. It strongly disturbs bears, but also the pound has no reason for essential growth yet.

Saudi Arabia managed to attract this week debt financing on the amount of $17.5 billion from sale of 5-, 10-and 30-years bonds. The unprecedented fact of an entry into the world market of debt obligations specifies deterioration in a financial position of the largest oil supplier. Budget deficit - maximum in 20 years, the government had to dip a hand into currency holdings, to allow internal sales of bonds on the amount about $63 billion, and also the first public share placement of oil giant Saudi Aramco. The public expenditures and social programs are cut down. It is clear, that any questions of reasonable prices cause rather nervous reaction, however on Tuesday in London official representatives of Saudi Arabia and Kuwait were forced to concretize the purposes and to declare that the price in the range of $50-$60 could guarantee the acceptable level of the offer and inventories.

From the other news should note:

  1. Deutsche Bank returned on the market by the sharp growth of nearly at 4%. As the cause may be information in the Manager Magazine, that sovereign funds of Qatar and Abu Dhabi together with the Chinese investors are ready to increase the share fraction of DB to 25% in case of increase in the equity by bank. In spite of the fact that such options were discussed for a long time, even the hint was enough for adoption of such decision for jump of interest in bank. It proves once again that practically all German shares are too oversold, it is time to grow.
  2. Since the beginning of «Gold week» (the last 10 days) the onshore yuan (USDCNY) actively weakens: the fixed devaluation by 0,35% - the biggest since August of the last year. In spite of the fact that already nearby critical levels of September, 2010 when yuan exchange rate was «untied» from dollar, NBK consciously «allows» the currency to fall, that it is possible to consider as the next prevention to FRS. Against the background of threat of increase in the American rates capital outflow from China proceeds: the Chinese banks sharply increased sales of foreign currency last month: net volume of sales 179.3 billion yuans - the maximum for the half of a year.
  3. Though the credits in yens don't fall under sanctions against Russia, the Japanese banks issue them very carefully, being afraid of reaction of the USA. Nevertheless, the state Japanese bank of international cooperation (JBIC) is ready to allocate the credit of about ¥4 billion ($39 million) to the Russian Sberbank, which because of sanctions can't carry out external loans, in hope to make progress in bilateral negotiations on the disputable Kuril Islands. The credit is planned to be spent for purchase of the equipment for transportation of coal for the East port which is managed by Eastern Stevedoring Holdings Corp.

The next two weeks have to be volatile. Important data of the USA, a meeting of FRS, an election of the president of the USA will lead to the sharp movements in the markets, liquidity will be low because many investors will prefer to be out of the market.

Preliminary data on GDP growth of the USA for the 3rd quarter and a provisional estimation of economic growth of the Great Britain - the first multiple-factor overview of national economy after the referendum on June 23 deserve on attention at current week. It makes sense to analyze performances of members of the European Central Bank regarding the insider according to the decision at a meeting in December, but for revelations so far rather early. You may listen to Carney once again with the speech about economic consequences of Brexit and Draghi's performance on an action in Berlin.

EUR/USD: Resistance are connected with the key level of 1.0900: (1.0875/1.0920) - (1.0943/1.1019). Trade will define the direction above/below for a week. At breakdown levels are urgent down: 1.0830 - (1.0800/1.0780) - (1.0735/1.0690) - 1.0630 (protection).

USD/JPY: resistance (104.01/104.16) (strong) - (104.37/104.69) (protects the level of large options on 105.20); supports: (103.89/103.80) - (103.30/103.17) (protection) - 102.78 (strong). Breakdown 103.10 is dangerous by strong falling.

Author: Navsher Bartash,
ForexChief Currency strategist