We never have too much money

Increased attention to EUR/USD exchange rate prepares the market for a dramatic leap right after ECB's and FRS meetings in December
The main ideas of the previous week have been completed. FRS and ECB did not knock down general tendencies. FOMC protocols were simply under obligation to show the officials' desire to raise rates in December. However, something went wrong. The Committee is evasive, it is in doubts, it leaves loopholes for itself. ECB protocols did not say anything new either. The market is in search of strong market factors and has not made any decision with regard to any movement. Most of FRS members are confident that the conditions for rate increase will be satisfied until the meeting on December 16. At least, "the wide range of information" will be assessed again, and those very conditions will be adjusted. It is necessary to remember that the FRS Meeting on October 28 took place prior to the publication of strong non-farms payrolls data for October; therefore, the opinions of FRS members in the protocol on the labor market can be regarded as outdated. FRS members intend to raise the rate amid fears that, otherwise, the US Congress may consider FRS policy as ineffective and replace the decisions made by FRS members with a habitual formula that determines the trajectory of rates. At her semiannual report to the US Congress on December 3, Yellen will have hard time.

Speculators were scared with a large number of reservations in the protocols; however, it came to one meaning in the result: let's raise the rates when the terms will acceptable. And although the adoption of the key decision is, as the saying goes, at hand, some doubts are still there; some adjustment can be applied, and when the market will be confident of irrevocability, then the trend will change to a downward one again.

The ECB protocol did not say anything new either:

  • Draghi fears the growth of yield of the Eurozone's state treasury bills after FRS rate increase;
  • Negative inflation risks have grown;
  • The revision of inflation forecasts towards reduction is very dangerous;
  • The current measures taken by ECB are not enough for reaching the target level of inflation;
  • ECB must revise its policy on December 3 and adopt additional measures, if necessary.

Increased attention to EUR/USD exchange rate prepares the market for a dramatic leap right after ECB's and FRS meetings in December. Meanwhile, European profits are growing, the assessment value of shares is attractive, and ECB is buying bonds for billions of euros in order to support the market. It is going to be extremely costly to go against the Central Bank now, If ECB continues to add stimulus measures, and the Federal Reserve continues to reduce them, euro will remain under pressure for a long time. Cheap euro increases demand for exports, and the monsters like Germany obviously benefit from it. However, when there are too many buyers on the market, it becomes dangerous. All the good news has already been included into the price. The danger focus is gradually shifting to the East. In August, European share lost 10% of their value on the Chinese crisis. The expansion of the Chinese economy over the last ten years resulted in the fact that its input into the global GDP under the current growth rate is higher than before the crisis. Draghi may be simply late with his QE expansion.

The European inflation stubbornly stays below the target level. If the Chinese economy stumbles now, and the country devalues its currency again, Europe will be the first to experience the impact. This will not only cause damages to European exporters, but will also lead to importation of deflation to Europe. If the market reverses it will be difficult to close positions, since everyone will want to sell shares at the same time and will run to the exit. And that means that those investors that buy European shares now will have to experience losses. Under any other outcome EUR will only have to grow even following a short-term decline after the raise of FRS rates. It is already seen that the market has long worked off curtailing of QE and a significant share of expectations regarding rate increase - in terms of the number of option contracts on basic levels from 1.1500 to 1.3500.

The following can be noted from the other news:

  1. An extraordinary FOMC meeting was held on Monday. Such extraordinary meetings have been quite habitual, the Board of Governors resolves technical issues: an increase of discount rates (three items in the "package") - the likelihood of increase is very high. That means preparation for the rate increase in December on the part of the Regulator. It was promised to publish the results on the FRS website today; however, there was no information available as of the moment of writing the report.
  2. At the end of the previous month, the well-known lawyer Ralph Nader criticized FRS heavily because the Regulator held interest rates at the level close to zero; he insisted that it would reflect negatively on common investors. When responding to the lawyer's open letter, Yellen had to promise again that the process of normalizing the policy would be gradual, and she also justified the FRS soft policy with improvements on the labor market after the global financial crisis and expressed hopes that inflation would drift towards price stability. However, that hardly persuaded the American consumer.
  3. The Asian global factor is stabilizing. International ratings agency S&P affirmed Chinese sovereign rating at the level of AA-/A- 1+. The forecast is stable. According to S&P forecasts, the growth of the Chinese economy will be 6% and more, at least, until 2019, which corresponds to the growth of real GDP per capita by 5.5%.
  4. On Monday, the Nikkei newspaper wrote that the Japanese government is planning to increase the minimum wage by 3%, as well as will provide some financial aid to retired people who live on pension in order to spur consumer spending.
  5. On Thursday, the Greek legislators adopted a package of economic reforms required for allocation of up to 12 bln euros from the salvation program by international creditors. On Monday, the Eurogroup Working Group agreed that Greece completed its actions in the framework of coordinated reforms; in this regard, the final statement will be published on Saturday; however, the decision to provide 2 bln euros to Greece this week has already been adopted, if nothing emergent happens.
  6. By the Bloomberg reports, three lawsuits against ECB have been filed to German courts, which are related to the program of assets purchase under QE. Two lawsuits were filed by large industrial groups, and one - by the head of ALFA political party. Court proceedings can complicate ECB's life and take away its maneuverability regarding the QE program.

On Thursday, the USA is on holiday due to Thanksgiving Day, and it will be a short trading session on Friday. Wednesday promises to be the most active day of the current week. Today, we should expect the second assessment of the US GDP for the 3rd quarter (upward revision is expected) and tomorrow, we will have the report on inflation of consumer spending (the main factor for FRS decisions regarding the rate). On Tuesday, the Parliament hearings on the matters of British inflation can produce significant influence not only on pound but also on EUR/USD via EUR/GBP, so those who like to work with this cross rate should be attentive.

EUR/USD: The main obstacle for upward movement: 1.0650-1.0720, in case of consolidation above 1.7770, a dramatic move towards 1.0978-1.1100 will be possible. The low mark of the mid-term support range 1.0600 has been reached, the risk of penetration below still remains high. A fall to the market makers' target protection in the area 1.0522-1.0516 is possible, it is strengthened at intermediate marks 1.0567-1.0550. Increased attention of speculators on the futures market is seen with regard to range 1.0600-1.0500. Penetration of 1.0500 will launch the scenario of fast fall to parity.

作者: Navsher Bartash,
ForexChief Currency strategist