US And EZ Concerns Cap EURUSD Moves

Posted by: Kiara Eva / On: May 19, 2011 / No Comments »

In the past week there have been a number of headline grabbing stories in the world of finance, some of which had a more direct impact on the markets than others. The arrest and then resignation of IMF Chief Dominque Strauss-Kahn (DSK) was the biggest story of the week and it initially raised concerns about how it would affect the EcoFin discussions on Greece. As the meeting progressed, investors soon realized that without DSK life still goes on. He may have been crucial to the talks, but not much progress was being made before the EcoFin meeting anyway. On Wednesday, the Federal Reserve laid out its preferred exit strategy, leading some investors to believe that the central bank was gearing up for an exit. However those expectations were squashed by a series of disappointing U.S. economic reports.  The week ended with Fitch downgrading Greece’s sovereign debt rating, resurrecting concerns about Europe’s sovereign debt troubles. The anemic recovery in the U.S. and the prospect of further trouble in the Eurozone has capped the move in the EUR/USD. The world’s most actively traded currency pair ends the week less than a percent higher than where it started.

This past week, the Fed outlined the most likely steps that they would take to unwind the emergency stimulus imposed on the U.S. economy. Initially this was interpreted as a step towards normalization and was therefore positive for the dollar even though the Fed said talking about an exit strategy does not mean they are ready to implement one. However after a barrage of weaker U.S. economic reports towards the end of last week that included a drop in existing home sales, leading indicators and manufacturing activity, investors realized that the Fed is still a ways away from raising interest rates and so they resumed their sale of U.S. dollars.  Retailers are also suffering with Gap cutting its profit forecast by 22 percent. A rate hike from the Federal Reserve is not expected until the second quarter of next year and so there is very little reason for investors to unwind their short dollar trades, let alone to start investing in U.S. dollars.  However at the same time, more trouble in Greece has prevented investors from buying euros, explaining the range bound price action of the currency pair this past week. In fact, aside from USD/JPY and the NZD/USD, none of the major currencies experienced a trend based move this week.&nbsp USD/JPY gained some upside momentum but on a percentage basis, the rally was nominal.  Hopefully next week will be a more decisive one for the U.S. dollar with new home sales, durable goods, the second release of GDP (which is less important than the first), personal income, personal spending, pending home sales and the final University of Michigan consumer confidence reportS scheduled for release.

EUR: GREEK PROBLEMS ARE NOT GOING AWAY

Better than expected economic data failed to help the euro which was sold aggressively after Fitch downgraded the country’s sovereign debt rating. Considering that Fitch had the Greek rating 3 notches above Moody’s and 4 notches above Standard & Poor’s before their downgrade, the announcement should not have triggered as much of a reaction as it did. However investors have been worried about Greece all week and the announcement only reminded everyone about the severity of the country’s problems and the realistic risk of default. The 3 notch downgrade from BB+ to B+ came with a warning of more to come if the country does not receive additional aid. The problem is that European nations have been reluctant to provide the country with additional support unless they take privatization measures and cut spending. Restructuring or re-profiling of the debt does not seem to be an option because of the losses that would be incurred by European banks with Greek debt exposure. At the same time, re-profiling, which is a fancy way of saying extending the maturities of the debt would be synonymous with a default to Fitch. Based upon comments from policymakers inside and outside of Europe, this is not an option that they want to take. This afternoon, Standard & Poor’s downgraded the credit rating of Credit Agricole, one of France’s largest banks to A+ from AA- due to its “exposure to the troubled Greek economy.”   French banks are up to their necks in Greek exposure followed by German banks while U.K. banks have very little. The problems in Greece have overshadowed the prospect of higher interest rates from the ECB. Despite the latest problems, ECB officials continue to talk of the need for additional tightening. German producer prices rose 1.0 percent last month, which was much stronger than the market had anticipated. The Eurozone current account surplus also declined from -8.9B to -3.8B. The positive economic reports are in line with the cautiously optimistic comments from the Bundesbank who said the Eurozone economic recovery has gained momentum and the outlook for the global economy remains favorable.   The German central bank expects domestic demand to “take off shortly” and “employment growth” to continue but the momentum experienced in the first quarter could decline. There are a ton of European economic reports on the calendar next week that could bring fundamentals back to the forefront. This includes the PMI report on manufacturing and service sector activity as well as the German IFO report of business confidence.

GBP: KEEP AN EYE ON BOE COMMENTS

The British pound ended the day sharply higher against the euro and slightly higher against the U.S. dollar. The deep sell-off in EUR/GBP reflects the market’s concerns about exposure of European banks to Greek debt versus U.K. banks. Although it has been a busy week for the U.K., there was little volatility in the currency with the GBP/USD trapped in a 200 pip trading range for most of the week. Higher consumer prices and retail sales were offset by a rise in jobless claims. The lack of new revelations in the MPC minutes left sterling traders with little to key off of. The recent improvements in U.K. economic data are expected to be temporary and with BoE member Sentance leaving central bank at the end of the month, the Monetary Policy Committee could find themselves less hawkish. The initial comments from Ben Broadbent, Sentance’s successor suggests that he is in no rush to raise interest rates. However we will have to wait until the following month to see exactly where he stands. The same is true for economic data. This month’s reports were distorted by the Royal Wedding. Before making any rash decisions, the BoE will need to see how consumer spending fared since then. Unfortunately waiting may be just what sterling traders need to do because the economic calendar is very light next week. Public sector finances, revisions to first quarter GDP and consumer confidence are the only pieces of market moving data on the calendar. Instead, it will be more important for pound traders to keep an eye on comments from BoE officials scheduled to speak next week. This includes Tucker on Monday, Fisher on Tuesday, Sentance on Wednesday and Tucker again on Thursday.

CAD: HIT BY WEAK RETAIL SALES AND CPI

Weaker than expected economic data from Canada drove the CAD sharply lower against the U.S. dollar. Consumer spending was flat in the month of March and excluding the increase in auto purchases, retail sales actually fell 0.1 percent. If not for higher food and energy costs, consumer spending would have been even weaker because volume declined 0.8 percent. Earlier in the day, consumer prices rose less than expected for the month of April, as the strength of the Canadian dollar mitigated price pressures. Consumer prices rose only 0.3 percent in April and by 3.3 percent on an annualized basis. Food and energy prices increased but not by enough to meet the market’s lofty expectations. The Canadian CPI report explains the reason why central bank officials around the world have not loudly complained about a strong currency because they leaned on it to help offset inflationary pressures.   Core prices rose by 0.2 percent compared to 0.7 percent growth experienced the previous month. Earlier this week, BoC Governor Carney signaled growing concern about price pressures. However the latest CPI report should reduce pressure on the central bank to raise rates while the disappointing retail sales report will give them a stronger reason to keep monetary policy easy. The New Zealand dollar on the other hand powered higher for the fourth consecutive trading day following a report that showed credit card spending rising 1.6 percent in the month of April. The New Zealand economy is improving and the government’s projection for an operating surplus in 2015 has lent support to the currency. The Australian dollar ended the day unchanged with no economic reports on the calendar.

JPY: MORE STIMULUS FROM BOJ LESS LIKELY

The Japanese Yen had a mixed day today after it initially headed for a weekly loss against all of its major counterparts following the Bank of Japan policy meeting before changing course against some currencies. The biggest news affecting the direction of the Yen now was last night’s BOJ Monetary Policy announcement. The central bank’s board members unanimously voted to keep monetary policy unchanged, despite the fact that Japan is now technically in a recession. The general consensus amongst economists and the central bank itself is that the Japanese economy will contract around 0.5 percent in fiscal year 2011, although slight growth is expected in the fourth quarter. The BOJ will be maintaining its 30 trillion Yen or $370 billion credit facility and its 10 trillion Yen or $123 billion asset purchase program. Last month, Deputy BOJ Governor Kiyohiko Nishimura voted to increase asset purchases and stimulus measures, but has changed his view at the most recent meeting at which he voted against any further monetary easing. Although there are still chances for additional easing from the central bank, the board’s unanimous decision indicates a subtle step towards policy normalization. Given that the central bank’s primary policy tools are its credit program and asset purchase fund, it is possible that the bank may also be preparing for further easing should the nation’s economic condition worsen. Last week, BOJ Executive Director Masayoshi Amamiya announced that the bank was in the process of seeking the government’s approval for increasing its amount in legal reserves in order to remain financially healthy, and that increased capital would allow the bank to take “appropriate and flexible action.” A few leading Japanese economists are predicting that the bank could implement further policy easing as early as August, when the government is expected to announce its plans for a second additional stimulus to support the nation’s large-scale reconstruction efforts. Next week, Japan is expected to release an array of economic reports and data including the BOJ’s Monthly Report and Monetary Policy Meeting minutes, Trade Balance, Consumer Price Index and Retail Sales figures.

EUR/USD: Currency in Play for Next 24 Hours

The EUR/USD will be our currency pair in play for Monday. From the Eurozone, we expect French and German Purchasing Managers’ Index data at 3:00 AM NY TIME / 7:00 GMT, and 3:30 AM NY TIME / 7:30 GMT, respectively. In addition, Manufacturing and Service sector PMI data is also expected from the Eurozone at 4:00 AM NY TIME / 8:00 GMT. The United States is expected to release Chicago Fed Nativity Index figures at 8:30 AM NY TIME / 12:30 GMT.

The EUR/USD pared most of its weekly gains today, and is trading within a downtrend once again, after briefly breaking out yesterday, which we determined using Bollinger Bands. The pair appears to be headed on a correction path to its decline from November 2009 to June 2010. Since its 2009 peak, the pair fell nearly 3,300 pips or 24 percent to its 2010 low. The pair has since recovered to as close as 200 pips or 1.3 percent of its peak, before falling to current levels. The nearest level of support is the 100-day simple moving average of 1.3962, which is just below the psychologically significant 1.4000 level. If this level is broken, the pair should find major support at the 61.8% Fibonacci Retracement of 1.3895, drawn from the 2009 high of 1.5143 to the 2010 low of 1.1876. The nearest level of significant resistance is at the 50-day simple moving average of 1.4341, which is just above the point of completion to the pair’s recently completed correction of the decline from November 2010 to January 2011. If the pair crosses this level, the 78.6% Fibonacci Retracement of 1.4444 should serve as further resistance.

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