The local battles which fell short of expectations

The IMF sharply worsened the estimation for growth rates of economy of the USA from 2.2% to 1.6%

Last week disappointed both market bulls, and pessimists. They continue to sell euros, Greece was given the new credit, in Algeria didn't reach an agreement, oil decided not to fall, and Great Britain decided to consult with parliament. As a result the dollar closed week on a high note, is much higher than the estimated purposes.

Expectations at the rates in the USA remain the main incentive of purchases of dollar – last week this probability kept near 70% and it wasn't prevented by FOMC protocols with already habitual internal differences and fear of decrease in trust to FRS.

The IMF sharply worsened the estimation for growth rates of economy of the USA (from 2,2% to 1,6%), that below the estimation FOMC level (1,9%). Nevertheless, FRS waits for acceleration of GDP growth following the results of the current year, despite decrease in estimation of potential of economic growth in the average and long term. So far the actual GDP growth for the first and second quarter is by 1,1% and 1,4% respectively. The growth indicators will hardly influence to the decision about rate. The fear not to keep the promise will be a strong argument for cause of increase in a rate in December, at least as «up motion», to have ability to reduce it during future (practically - already planned) recession.

The situation with euroQE continues to gather a negative. The program of the purchasing of corporate debt securities led to decrease in their cost to historical minima and they don't required criteria of the program of the redemption of the regulator any more. Profitability of Eurobonds, which overall amount is by €2,6 trillion, fell below zero after the ECB redeemed debt securities for € 1,3 trillion, including corporate bonds for €32 billion. No wonder that regular speculative «throw» of information begins (even if with the subsequent confutation!) - the ECB begins to accustom the market to a thought of gradual turning of QE.

Forthcoming week the ECB is obviously going to discuss a possibility of technical changes into the QE program. But all decisions on this matter will be postponed until December, when the destiny of the program for the period after March, 2017 is decided. In particular, a mitigation of rules can be offered (of course, partially and temporarily), demanding from the ECB to purchase a national debt pro rata to the size of economy of the specific country.

Greece becomes a currently central source of risk for the eurozone again. On October 11 the Eurogroup approved payment of a tranche of the credit to Greece in the amount of €1,1 billion, but the remained €1,7 billion are decided to hold till October 24. Even besides that already granted IMF loans is extremely expensive for Greece, the fund refuses flatly further participation in the aid program until the debt of Athens is re-structured. The next showdown between Germany and the IMF is expected. All this creates background for new crisis in Germany, and there is a danger, that in a present situation - when France, Germany and Netherlands prepare for elections - a capability of the eurozone to find collective solutions will significantly decrease.

The prime minister May had to perform a pirouette back and to recognize, that the parliament shall have an opportunity to vote for hers plan of an exit of Britain from the EU, but to make it so that to give her «sufficient space for maneuver». Hard Brexit's scenario becomes less probable, though clean divorce with Europe is desirable for Conservatives. It will be serious battle in the parliament.

Great Britain is going to pay a half of a fee in the EU for maintenance of access to European Single Market, it confirms the fact, that this question remains the basic purpose of negotiations with the EU.

Weakening of pound made the strongest impact on consumer prices, having sharply increased import cost. Recent panic selling of sterling obviously made a strong impression on the government. BOE predicts acceleration of inflation to the target objective in 2% by 2018 and is hardly ready to raise an interest rate in the nearest future. If the authorities after all accept the measures stimulating the market, GBP/USD will have a correction potential at least to 1.2685, and in case of breakthrough of this level - to 1.3450.

Italy for the first time sold 50-year bonds (04.10.16) and improbable demand is fixed for them (about €16.5 billion - in 5 times more than the estimation). And this with the fact, that the Italian banks - the financial «zombies», loaded with fatal amounts of debts, which keep afloat only thanks to serial sanitation. Buyers aren't stopped by the fact that those who buy now 50-year bonds of France, Belgium and Spain (and in Ireland even 100-year-old were offered!), may not live through their settlement.

However, none of today's investors consider these bonds like Italian - as soon as they are purchased (with a markup), they will become, in fact, the German debt guaranteed by ECB. It is staked on the fact, that ECB will add such «superlong» bonds to the QE program soon. All expect an easy jackpot, if there is an expansion of restriction on repayment periods within bond purchase in the amount of €1.7 trillion by the end of this year.

From other news:

  1. In all appearance, the national debt of the USA will manage «to pass» a mark of $20 trillion even before change of the president. Officially established ceiling in $20,1 trillion was supposed to be reached by March of the 2017th, but for the last eight working days the national debt of America increased more than by $170 billion, having approached $19,7 trillion (more than 105% of GDP). Even during the favorable periods a rate of debt increase exceeded growth of economy - in such conditions debt servicing can cost much to the budget.
  2. Monthly reports on oil from MEA and OPEC showed increase in production on 600 thousand barrels, 100 thousand from them were the share of OPEC, and 500 thousand on the countries out of OPEC, generally to Russia and Kazakhstan. Information that Iran expands direct contacts for deliveries to China, only confirms opinion that arrangements in Algeria again only look optimistic, but their implementation - is nonbinding.
  3. Selling prices of the Chinese producers unexpectedly grew in September for the first time almost in 5 years, most likely thanks to staple prices. Corporate China sits for $18 trillion a debt, that is equivalent to about 169% of GDP, and any improvement of indicators of the consumer market reduces concerns of investors.

Except the European Central Bank, it is worth paying attention on Monday to Fischer's performances from FRS, Draghi on an action in Frankfurt and Vaydman who remains the active opponent of any QE, and further - on the publication of the Chinese data on GDP for the third quarter and the British reports on inflation, employment and retails.

GBP/USD: supports: 1.2147 (strong) - (1.2121/1.2101) - (1.2087/1.1983) (protection of level 1.2000); resistance: 1.2175 - (1.2200/1.2210) (strong) - 1.2233 (strong) - (1.2257/12265) (very strong). Despite the huge volume of short speculative positions, most likely, the considerable movement prepares up.

EUR/USD: special attention to a zone 1.0960/50. Trade is dangerous by falling to 1.0910 - 1.0860 - (1.0778/1.0738). This risk can reduce only return to a zone of medium-term support: (1.0980/1.1020). Strong resistance: 1.1030 - 1.1050 - 1.1090. Restoration is possible only at sure trade higher than 1.1111. We wait for results from the European Central Bank.

作者: Lachlan Patel,
ForexChief Currency strategist