Overview
The European Central Bank is under pressure to act on Thursday to help the Euro zone contain a crippling debt crisis that has stoked contagion fears in the United States and Asia World stocks rose for a second straight day while the euro sat on the previous day's gains as expectations grew the European Central Bank might deliver measures to alleviate worries over Euro zone debt.
Currencies
EURUSD
In the Asian session, EUR/USD opened at 1.3140 after making a strong reversal higher in great part due to expectations the European Central Bank (ECB) will aggressively increase their peripheral European bond buying plan when they meet later today. The EUR/USD traded to 1.3144 before prop traders and US names squaring up sold decent amounts. The EUR/USD was also pressured by a fall in the AUD/USD following the worse than expected Australian Retail Sales. The pairing traded down to 1.3106 before talk of sovereign buying interest helped to underpin. The EUR/USD was trading around 1.3110 heading into the afternoon session. The ECB meeting later today will be the key vent for the EUR, as well as the European zone sovereign debt markets and risk assets in general. The market is expecting the ECB to take decisive action and announce an increased pace of peripheral European bond purchases at the very least. Analysts warn that the hawkish elements within the ECB led by Axel Weber will resist the move. Sellers are lined up between 1.32/1.33 while sovereign names are rumoured buyers ahead of 1.31500. European interest rate decision today at 12:45GMT.
GBPUSD
GBP/USD opened in Asia at 1.5623 and did little, trading sideways in a 1.5598/1.5630 range as the market sits tight ahead of tonight’s ECB meeting. Sizeable supply near 1.5650 capped GBP/USD yesterday, after the pound was boosted by November's unexpected UK manufacturing sector PMI leap to a 16-year high of 58.0, and fresh sell interest may emerge near the level if it is threatened again (offers by 1.5650 also capped sterling on Monday). A break through 1.5650 could spur some stop-loss buying, with further offers then touted at 1.5670 and 1.5700. Bids around 1.5550 pushed yesterday's decline from 1.5649, with the ensuing climb to a high of 1.5636 fuelled by EUR/USD strength. EUR/GBP opened in Asia at 0.8408 and is trading in a narrow 0.8399/0.8425 range. Given the market focus on the ongoing European zone peripheral debt crisis, all eyes will be on the ECB press conference at 1330GMT today with expectations for a substantial increase in the peripheral bond buying program.
USDJPY
USD/JPY rallied from a late Tokyo low of 83.38 to 84.40 overnight with rallies in the JPY crosses pushing it higher. The recent USD/JPY fall to 83.38 was mostly cross-inspired, and the bounce was not surprising with specs tiring of targeting downside USD/JPY stops after only scant success sub-83.50. The surge in US yields helped, and look to support it going forward. Asia saw a very tight 84.05-21 range. Bids trail lower from around 84.00. Topside, offers from option players ahead of presumed barriers at 84.50 and Japanese exporter interest capped it but stops are eyed above. More offers are seen ahead of presumed 85.00 option barriers with stops above this rate. JPY crosses turned lower after the rallies seen overnight. EUR/JPY led the pack, easing from 110.60 to 110.16 and threatening a move back below 110. Stops are seen sub-109.90. Offers look heavy ahead of 111.00. AUD/JPY fell hard too from a high overnight of 81.64 and 81.54 early in Asia to 80.91. GBP/JPY and NZD/JPY saw less downside between 131.17/54 and 62.90/90.
AUDUSD
The Australian dollar was soft at $0.9637, after falling as far as $0.9621. It had traded at $0.9666 before the data. Support is at the 2-1/2-month low of $0.9536 hit on Wednesday. Data showed retail sales in October dropped 1.1 percent, the biggest fall in 15 months. That was far weaker than forecasts for a 0.3 percent rise, with some analysts saying the fall was in part due to higher interest rates. The Reserve Bank of Australia had raised rates by 25 basis points to 4.75 percent in November, as a pre-emptive strike against inflation. Given household consumption accounts for about 55 percent of Australia's economy, disappointing retail sales cast doubts over whether the economy could re-accelarate in the fourth quarter, although it did not alter rate hike bets. After the RBA's comments last week that investors were not unreasonable to expect the next rate hike to come in mid-2011, investors have been priced for no change in rates before June. That said, analysts noted the surprisingly big trade surplus in October showed Australia's booming commodities' sector should drive household incomes higher in coming months.
