FRS and ECB: explain, threaten and fear

This week, we are expecting an information impact made by quarterly reports
Last week was rich in statements and comments. By all appearances, FRS was not happy with the market response to its decision on the rate; therefore, it tried to distract the market again using discussions on rates, which meant "when", "how much", and the main thing - "why". All of that provided slight support to dollar. However, is it going to be for long? The Federal Reserve officials understand clearly that extension of rate increase date will result in the fall of US state treasury bills yield and growth of bubbles in the debt market; that is why they planned to support stock market with their decision on September 17. As to investors, they were scared by the stress made by FRS on global risks, and the market experienced a dropdown anyway, although the decision was made to leave cheap money on it. It was decided to think that assets fell due to uncertainty; however, it the market should be given an active explanation that everything is good in the world and the US economy now, and that things won't be worse because of one rate increase. As usual, much was said and it was vague. Nevertheless, the market believes that low inflation and global problems headed by China are the main problems for tightening of monetary and credit policy.

Yellen's speech, unlike her regular statements regarding economy recovery, was another attempt to persuade markets that FRS has this situation under control and developed a clear plan. However, the main thing is the statement that international events will not have significant influence on FRS policy; in this regard, China was not mentioned a single time. It is remarkable that Yellen in her Friday speech made a 180 degree turn. But if the market "does not hear" again and responds "in the wrong way" again, FRS will likely change its intentions once more - and that will be literally this week. For now, the US stock market after Yellen's speech and excellent American GDP has been moving in the old pattern - downwards, since it is not able to grow any more without QE.

At first, euro held out under pressure while expecting expansion of ECB QE, but Draghi's words sobered optimists - we shouldn't wait for that in the nearest future, and he confined himself to traditional promises "if necessary, we are ready to change everything for QE: amount, dates, structure", and the rest. Statements made by other European officials (except Weidman, of course), in general, were in support of their boss. If expansion still takes place, euro will be expecting a new wave of long-term decline due to increase of its role as the funding currency.

The following of the other last week's events should be noted:

- The results of Sunday elections in Catalonia had a negative affect on EUR/USD in the first hours at the opening of the week - Junts Pel Si party (Together For Yes), which demands Catalonia's independence of Spain, won. If their ally, anti-capitalist party CUP, takes 10 seats, those parties will have a majority in the local government. Europe will hardly be ready for a new state on its territory;

- ECB discovered that some banks do not comply with the requirement to divide auditor and risk functions in management, allow concentration of power with individual members of boards of directors, practice informational blockade of undesirable members of boards, etc. How and what it affects and how it must be "treated" is still under study by analysts;

- It was announced that IMF is getting ready to include Chinese yuan into global reserve currencies, and the USA, along with other large participants, supports this measure. Including yuan into the SDR Basket Currency (for calculation of special loan rights) can seriously shake markets, and Asian first of all;

- In Germany, totally in the wrong time and in the wrong circumstances, a conflict with Volkswagen is underway, some analysts believe that the scale of losses is that comparable to the Greek problems. Even if the problem with emission testing falsification is a simply exaggerated scandal, surely, it will not end with the retirement of the Chief Executive Officer. Loss of trust, loss of jobs, billion-euro fines (18 billion, which is higher than the company's operating income for the previous year), reduction of sales. It affects German and EU economy heavily;

- US is heading for another increase of national debt ceiling; Obama will meet with the Congress leaders on October 2 and will insist on "net" increase of national debt ceiling in the nearest future, and, most likely, there will be no delay in making a decision (Joe Boehner, House Speaker, will be retiring at the end of October). The influence of dollar rate will be limited.

This week, we are expecting an information impact made by quarterly reports from companies and inflation statistics, by quarterly reports on US and Great Britain's GDP growth, and, of course, by NFP reports. The index of incomplete sales of immovable property in the USA published on Monday has already showed dramatic decline. The response to all those data is expected to be quite nervous, but in case of data publication on the level of forecasts, the influence on markets will be weak, since they will not increase chances for rate increase at the FRS meeting on October 28. We will be expecting a large block of information on Japan and China on Thursday morning, which may lead to significant volatility.

Due to fluctuating Asian weekends, we can consider goals only with regard to euro: while bulls are stubbornly getting offers on approach to 1.1280, which means that after stabilization above 1.1230 - 1.11250, short-term risks will shift towards 1.1300. Larger options are placed on level 1.1300, therefore, penetration upwards will support upward movement to key resistance near 1.1365 again. Today, options of volumes above 1 billion euros are closing at figure 1.1200. The interest to sale has been noted near 1.1200.

Author: Alexander Ward,
ForexChief Currency strategist