Euro Extends Rally After An Eventful Week, More Upside Ahead

After a very eventful week, euro ended up the strongest currency on optimism that Spain was closer to seeking a sovereign bailout. ECB president Draghi expressed in the post meeting press conference that the central bank is ready to buy bonds as soon as the needed conditions were satisfied. The message kept Spanish 10-year yield comfortably below 6% level.

Better-than-expected job market data from US helped lifted risk sentiments briefly but the overall tone in the currency markets was mixed. The sterling, aussie and kiwi had indeed closed the week lower against dollar. Canadian dollar was the one who could maintain its post NFP gain as itself was boosted by Canadian job data. The aussie was the weakest one after surprised RBA rate cut.

Technically, euro did strengthen last week as expected. Such strength is expected to extend into early part of this week. EUR/USD and EUR/JPY would then face resistance from 1.3171 and 103.86 respectively. The current price actions don't warrant enough momentum to break through yet and so, we'd be cautious and would tighten our stops when these two pairs approach the resistance levels. Though, the euro would likely remain firm against the aussie and sterling. Hence, we'd prefer to long EUR/AUD, and to a slightly lesser extent EUR/GBP this week.

In US, the nonfarm payroll report showed 114k growth in the US job market in September versus expectation of 111k. However, August number was revised sharply up from 96k to 142k. Unemployment rate dropped sharply from 8.1% to 7.8% versus expectation of a rise to 8.2%. That's also the lowest number in 44 months.

The September FOMC minutes gave reasons on the Fed's decision to announce QE3 last month. While little news was delivered, the minutes unveiled that policymakers had a vigorous discussion about shifting from calendar date-based policy targets toward data-driven thresholds.

The members also debated on means to reach a consensus economic forecast, the mechanism, upon completion, would replace the current method that each of the 19 members makes forecasts on his own. While the pace and timing of asset purchases remained unknown, it's expected that the QE3 would be continued for at least 2 years until policymakers see improvement in the job market.

As expected, the October ECB meeting was a non-event. Policymakers decided to leave interest rates unchanged while little surprise was heard from the press conference. President Draghi also stated that there was no discussion about the cutting the policy rates at the meeting, reinforcing our view that the central bank would leave interest rates unchanged till the year end. The press conference was focused on the OMT and Draghi reiterated the ECB would give no view on bond yields.

The ECB would also not purchase Irish or Portuguese bonds until they have regained full market access. The president also indicated that activation of the OMT would be determined by the governments. Many viewed his comments as a call for Spain and the Eurogroup to activate an ESM program.

To our surprise, the RBA, after 3 months' of pause, lowered the cash rate by -25 bps to 3.25% as the drop in commodity prices, slowdown in Chinese economy and strength in the Australian dollar weighed on the country's economy. The move was welcomed by Treasurer Wayne Swan who said that "Australians deserve cost of living relief and today that's what they got." The AUD weakened against the USD after the announcement.

BoJ left rates unchanged near 0% as widely expected. The asset purchase program was also held unchanged at JPY 55T. The central bank noted that Japan's economy is " more or less leveling off." That compared to last month's description that "the pick-up in economic activity has come to a pause." The BOJ said it would keep policy unchanged for now and pledged to continue asset purchases and other "powerful monetary easing" to spur growth. In a rare act, Economics Minister Seiji Maehara attended the rate review meeting urged BoJ to "pursue powerful monetary easing to achieve its price target."

BoE left interest rates unchanged at 0.5% and also kept the asset purchase target at GBP 375b as widely expected. No details was released and the and focus will turn to the minutes to be released on October 17.

Canadian employment data, showed 52.1k growth in September versus expectation of 15k. Though unemployment rate edged up from 7.3% to 7.4%.