EUR/USD – Japan Announces Purchase of ESM Bonds

In a major announcement, Japan announced that it would purchase bonds from the European Stability Mechanism (ESM) starting on Tuesday. The Japanese government said that the move would increase stability in the Eurozone and help stabilize the yen. The euro has edged higher, and is trading in the 1.3120 range. There are a host of Eurozone releases today. German Trade Balance looked sluggish, falling to a ten-month low, and Eurozone Retail Sales failed to meet the estimate. The Eurozone Unemployment Rate was unchanged at 11.8%.

On Tuesday, Japanese Finance Minister Taro Aso stated on Tuesday that Japan plans to purchase bonds from the European Stability Mechanism, which is the Eurozone’s bailout fund. The ECB was delighted with the news, and said that the ESM would begin issuing immediately. The first debt auction will be on Tuesday, with three-month notes being offered with a value of about 2 billion euros. This will be the first time that the ESM has issued securities since it was formed last October.

Finance Minister Aso said that the move will help bring more stability to the Eurozone, which in turn will also help stabilize the yen and other currencies. Japan has already purchased about 7 billion euros from the European Financial Stability Facility (EFSF). Both bailout funds will run in parallel until the EFSF is phased out later in 2013. Clearly, the Japanese government’s primary motivation is not to save the Euro-zone. The purchase of ESM bonds with yen will allow Prime Minister Shinzo Abe to continue to weaken the Japanese currency (and strengthen the euro at the same time) without sustaining further criticism from the US and other countries, who are worried about the aggressive economic stance of the new government and its call for unlimited easing by the Bank of Japan.

The markets cheered last week’s fiscal cliff agreement in Washington, but it appears that this was just the first of more bruising battles ahead. The hard-fought agreement, which was preceded by months of acrimony and bad blood between the Republicans and Democrats, was criticized by many analysts and economists as a deal comprised of the lowest common denominator which both sides could reluctantly compromise and agree on. However, the agreement left two critical issues for another day – the debt ceiling and spending cuts. The problem is, the clock on those issues is also winding down, as the debt ceiling will be reached in February, and action will have to be taken to avoid a default on the country’s debt. Otherwise, the real possibility of a US default will likely cause turmoil in the markets.

Taking a look at fundamentals, there were a host of releases out of the Eurozone on Tuesday, and the news was not very positive. German and French Trade Balance both looked weak. The German data was awful, as the indicator fell to 14.6 billion euros, well below the 15.4B estimate. The French numbers also disappointed, posting a deficit of 4.3B. The estimate stood at -4.8B. Eurozone Retail Sales bounced back into positive territory, but just barely, at 0.1%. This was below the forecast of a 0.3% gain. Unemployment numbers remain stubbornly high, with the Italian unemployment rate down from 11.2% to 11.1%, and the Eurozone rate stuck at 11.8%. For any recovery to get on track, these kinds of numbers will have to improve. The euro did not react to the data, but more bad economic news will certainly hurt the volatile currency.

EUR/USD for Tuesday, January 8, 2013

EUR/USD January 8 at 10:30 GMT

1.3117 H: 1.3140 L: 1.3103

EUR/USD Technical

S3 S2 S1 R1 R2 R3
1.30 1.3030 1.3080 1.3130 1.3170 1.3240

EUR/USD has halted last week’s losses, as a correction has been underway since Monday. There is resistance at 1.3130. The pair has already breached this line today, and we can expect it to continue to be tested during the day. This is followed by resistance at 1.3180. On the downside, the pair is receiving support at 1.3080. This line has strengthened slightly, as the pair has edged higher. However, given the recent volatility of the euro, it is also a vulnerable line.

Current range: 1.3080 to 1.3130.
Further levels in both directions:
• Below: 1.3080, 1.3030, 1.30, 1.2960, 1.2890, 1.28, 1.2750 and 1.2690.
• Above: 1.3130, 1.3170, 1.3240, 1.3180, 1.3130, 1.3280 and 1.3350.

OANDA’s Open Position Ratios

With EUR/USD taking a break from last week’s volatility, the ratio continues to show little movement. Trader sentiment continues to be strongly biased towards short positions, an indication that most traders expect the euro to lose further ground. However, the euro has managed to reverse last week’s sharp slide, and is now above the 1.31 line.

EUR/USD continues to be steady, without much movement. This is in sharp contrast to last week, where the pair shown strong movement in both directions. The markets shrugged off today’s uninspiring Eurozone releases, and with only third-tier US data coming out later, we could see the drifting continue during the day.

EUR/USD Fundamentals

• 7:00 German Trade Balance. Estimate 15.4B. Actual 14.6B.
• 7:45 French Trade Balance. Estimate -4.8B. Actual -4.3B.
• 9:00 Italian Unemployment Rate. Estimate 11.2%. Actual 11.1 %.
• 10:00 Eurozone Retail Sales. Estimate +0.3%. Actual 0.1%.
• 10:00 Eurozone Unemployment Rate. Estimate 11.8%. Actual 11.8%.
• 11:00 German Factory Orders. Estimate -1.4%.
• 15:00 US IBD/TIPP Economic Optimism. Estimate 46.3 points.
• 20:00 US Consumer Credit. Estimate 12.9B.

*Key releases are highlighted in bold
*All release times are GMT

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Kenny Fisher

Kenny Fisher

Market Analyst at OANDA
A highly experienced financial market analyst with a focus on fundamental analysis, Kenneth Fisher’s daily commentary covers a broad range of markets including forex, equities and commodities. His work has been published in several major online financial publications including, Seeking Alpha and FXStreet. Based in Israel, Kenny has been a MarketPulse contributor since 2012.
Kenny Fisher

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