Equities rally while the euro slumps
The price action in response was quite impressive with big rallies in equities. The MIB and IBEX outperformed after peripheral bond yields cooled significantly on the back of the news. The single currency took an absolute bath, with EUR/USD sliding to $1.2920, its lowest since July 2013.The momentum was just too much and the break below this week’s lows just saw the selling accelerate.
Traders will now be eyeing July lows at $1.2755 as the pair shows no signs of bouncing right now. As the ECB fleshes out its QE in October, the Fed will be winding down its own QE program. This just emphasises the kind of divergence to expect from this currency pair and shows just how much more room there is for another leg lower. Not only has the ECB taken a big step, it appears that some members were in favour of doing more and Draghi himself said further unconventional instruments may be used to alleviate risks of low inflation. As a result, it is clear the euro will remain a funding currency of choice and traders will continue to look for selling opportunities.
Greenback rally continues
While Europe was on fire, the momentum seems to have waned in some key markets, particularly the US, where positive economic data and some hawkish Fed commentary weighed on equities. This pushed the USD higher and saw USD/JPY reclaim the 105 handle, trading to a high of 105.37. In response, the Nikkei is facing a monster gain at the open with our current call pointing to a 2% rise to 15,752.
The ASX 200 is only pointing to a 0.1% gain at the open to 5637, with the continued resilience in the AUD not helping the situation. Iron ore extended its losses to 84.30 and this will continue to rattle confidence in the materials space.
Fortescue might give up some of yesterday’s gains today and traders will keep a close eye on that $4 level. Gold also traded near an 11-week low and this will hurt the precious metals names. However, the financials might find some buying interest with the prospect of cheap funds and an increase in supply out of Europe encouraging investors.