ECB’s bond plan supports the euro

he US dollar traded mixed against the majors as more details emerged regarding the ECB’s bond buying program and after the Bank of Canada kept rates on hold as expected. The US data flow was relatively light with 2Q final nonfarm productivity revised higher to 2.2% while unit labor costs were revised lower to 1.5%. Both releases were higher than anticipated. US Treasury yields1 edged higher across the curve and EU sovereign yields1 were broadly lower after more information was leaked from the ECB ahead of tomorrow’s meeting.

Buy the rumor, sell the fact?

Reports today indicated that the European Central Bank’s bond buying plan will be unlimited in size and sterilized. As indicated by Draghi before European Parliament days ago, the Bank will focus on the short end, buying maturities up to three years. The ECB has signaled its concern that monetary policy transmission is being impaired by high government bond yields and a fragmented euro area and the bond buying plan is intended to address those issues. The ECB is said to refrain from setting yield caps and will stress conditionality as bonds may be sold if conditions are not met.

Therefore, markets and governments will be paying close attention to Draghi tomorrow as to what conditions will be applied to the bond buys. After all, nations cannot receive aid unless they apply and even then, they must meet conditions set forth by the ECB. Spain’s Prime Minister has indicated in the past that he will not seek a full bailout until a plan is finalized by the ECB and there have been reports that the ECB may not finalize the plan until after the German constitutional court ruling on the ESM which is scheduled to occur next week (Sept. 12). With the potential for disappointment tomorrow on a concrete plan, we think there is scope for disappointment and potential EUR downside.

With many of the details already leaked, the market has largely priced in bond buying by the ECB and tomorrow’s event may be a “buy the rumor, sell the fact” type of situation. With EUR/USD facing long term technical resistance, the charts are showing a potential short opportunity. We favor EUR/USD downside while the pair remains below the 1.27 figure and a convincing break above this level would negate our view.

Loonie weaker after BOC

The Bank of Canada kept rates on hold at 1.00% and maintained its hawkish bias. The Bank did not seem overly concerned with the EU crisis saying that it is “contained” and “acute”. The statement did acknowledge softer than expected inflation which suggests that the removal of monetary policy stimulus may occur later rather than sooner and the CAD declined on the back of the statement. The CAD underperformed against the G10 currencies and USD/CAD rebounded above the 0.9900 figure after forming a triple bottom below the 0.9850 level.

Data Watch

On the data front for the upcoming Asia/Pacific session are Japan’s weekly securities investment figures, the August employment report out of Australia (which is forecast to show the unemployment rate tick higher to 5.3%), and a speech by Bank of Japan Governor Shirakawa.

Источник: Forex.com

05.09.2012