Forex - EURUSD Rallies as ECB's Smaghi Spills Cold Water on QE Expectations

Forex News and Events: Market activity in the last 24 hours has been haphazard and choppy. Just yesterday, the EURUSD was breaking the 1.2985 support and equities were poised for another leg down, as external pressures mounted. Today, the EURUSD has traded though 1.3200 and European equity markets are trading higher (following Asia's lead). While these moves are not shocking, especially compared to US yields, as the benchmark T-note broke through 3.0% for the first time since the Fed officially announced its QE program, it highlights how indecisive markets currently are. While the media main focus is still the swine flu (confirmed cases continued to rise), it has taken a back set to better than expected US economic data and comments from ECB members. Both US consumer confidence on the Conference Board and Richmond Fed manufacturing survey staged a significant recovery. This news helped the equity markets erase nearly all of its earlier loss and close only a tad lower. Perhaps the biggest game changer was Governing Council member Bini Smaghi comments yesterday which damped the markets expectations regarding the ECBs QE initiative. On the heels of Governing Council member Nowotny pro-QE statements, Smaghi highlighted alternative options to the asset purchase programs adopted by other central banks. Smaghi discussed indirect QE program that would increase the size of the ECB's balance sheet by lending to banks at longer maturities against collateral. At the 2nd April, press conference Trichet indicated that the Council would expand on the topic of ‘unconventional policies’ at the May 7th meeting. Subsequently numerous policy makers have publically reinforced the ECB acceptance to follow the Fed and BoE's course. We think the markets have over reacted to the statements since it goes against what ECB members recently commented. We speculate that should the ECB go in this direction, it could begin indirect QE program before the May 7th scheduled meeting. Today's highlights will be the release of US Q1 GDP and the FOMC rate decision. We are in line with the market consensus for -4.9% annualized on GDP and for no change in the current Fed Funds target range. The accompanying FOMC statement will be analyzed to see if the economic outlook has altered notably. In addition we expect the Fed to announce an expansion of its Treasury purchases at some point, however not today. I n New Zealand tonight, we expect the RBNZ to cut rates by 25bp, less than market consensus of a 50bp cut. Trade balance has improved enormously in the last few moths (including last night surprise) on a weaker NZD and soft domestic demand. The RBNZ statement should emphasize a continued path of gradual easing and avoid using unconventional measures to ease policy (a move that should relieve some pressure from the NZD).

Today's Key Issues (time in GMT): 00:00 EUR Poland- NBP interest rate announcement, % 30-Apr 3.75% exp, 3.75% prior 08:00 NOK Retail PMI, index Apr 44.1 prior 08:00 EUR Unemployment rate AKU, % (sa) Feb 3.3 exp, 3.1 prior 08:00 EUR M3, % y/y (3mma) Mar 5.7 (5.9) exp, 5.9 (6.5) prior 09:00 EUR Consumer confidence, index Apr -33 exp, -34 prior 09:00 CHF Industrial confidence, index Apr -36 exp, -38 prior 09:30 USD KoF leading indicator Apr -1.90 exp, -1.79 prior 12:30 USD GDP, % q/q saar Q1 -4.9 (-2.3) exp, -6.3 (-0.8) prior 12:30 ZAR GDP price index, % q/q saar Q1 1.7 (1.8) exp, 0.5 (2.0) prior 15:30 EUR CPI, % y/y Mar 8.4 exp, 8.6 prior 15:30 USD ECB's Stark speaks on "How to cope with the crisis: market versus state" 18:15 NZD FOMC interest rate announcement, % Apr hold at 0.0-0.25% 21:00 RBNZ interest rate announcement, % Apr 2.50% exp, 3.50% prior

The Risk Today: EurUsd The uncertainty that reigns in the markets and general population with regards to the Swine flu have heightened volatility, but it is safe to say that moves should be contained within the 1.2965 – 1.3300 range for now. Recent developments in the news may have stifled the dollar strength momentarily; however the general bearish trend remains as we head for consolidation and a long term target of the 1.2500 level. Initial support at 1.3200 (previous resistance and neckline for H&S in formation). Pivot at 1.3120 will confirm a resumption of bullish dollar. Initial resistance at 1.3230 (this morning’s high) however a strong push past 1.3303 would focus 1.3346 (trend line). GbpUsd Lacklustre trading conditions and a weakening of the dollar has seen the Pair trade higher throughout yesterday’s trading session as we near crucial levels. A cap at 1.4774 (pre-weekend high & last week’s high) – a move past this level would head for a strong resistance at 1.4963. This said, expect a retracement move to find support at 1.4683, with persistent dollar bulls (subsiding of Swine flu fears) push for 1.4626 then 1.4517. UsdJpy Initial Swine Flu fears sent the pair tumbling late Monday and early Tuesday, the Yen a preferred haven currency pushing the pair as low as 95.69 (1-month low). April has seen the Yen strengthen amidst renewed risk aversion as earning’s season and now the Swine Flu hurt Japanese Stocks. While we are seeing a retracement move from the support at 95.69 yesterday that seems to be over – 5 wave pattern enters A-B-C counter move initial resistance at 96.82 as the focus immediately is to the downside targeting 96.37. A failure to confirm the bearish move would re-test 97.05 and head for 98.17. UsdChf Swissy is benefitting greatly from risk aversion – the large amplitudes in the currency’s move a result of Roth speaking yesterday and further developments in global Swine Flu concerns. Head and Shoulders confirmed and broke lower in yesterday’s session as we head for strong support at 1.1354 a break past 1.1306 would target 1.1242 ( 6 April low). A timely retracement of the broad moves experienced yesterday and today would see resistance at 1.1428, a firm test of 1.1457 would warrant bullish concerns and a target at 1.1505.

Resistance and Support: EURUSD GBPUSD USDJPY USDCHF 1.3346 1.4963 98.17 1.1505 1.3303 1.4774 97.05 1.1457 1.3230 1.4745 96.82 1.1428 1.3236 1.4766 97.14 1.1374 1.3200 1.4683 96.37 1.1354 1.3100 1.4626 96.00 1.1306 1.3062 1.4517 95.63 1.1242 S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot