Behind the Underperformance of EUR/USD

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USD/JPY is on a tear this morning, breaking above 80 for the first time in 4 months. The rally has been gradual, happening slowly over the Asian and European trading sessions. However this morning, the dollar is struggling to extend its gains on the back of better than expected U.S. data. The big focus today are jobless claims, which finally give us a true sense of how the labor market is faring and the data was right in line with expectations. Claims dropped from 392k to 369k while continuing claims declined to 3.254M, its lowest level in more than 5 months. If we compare the current level of jobless claims to where it was 3 weeks ago before the reporting distortion, it hasn’t changed at all. There have been no further improvements in the labor market, reinforcing the central bank’s dismissal of recent upticks in U.S. data. Durable goods also beat expectations, rising 9.9% in the month of September after falling 13.1% in August. Transportation and defense orders take credit for a large part of the increase because excluding transportation orders, durables rose 2.0%. Pending home sales are still scheduled for release – stronger numbers are expected, which would be in line with other housing market reports.

The EUR/USD on the other hand isn’t performing nearly as well. Having hit a high of 1.3023 in the European session, EUR/USD completely turned around and is now flat on the day and risk of turning negative. With U.S. stocks opening higher, European stocks in positive territory and European bond yields pretty much unchanged, there has been no real explanation for the reversal outside of more setbacks on Greek aid. German Chancellor Merkel said there was no majority for reported Greek aid and according to the Finance Minister the Troika said they will not accept the changes in labor measures that Greece agreed to. Trouble in Greek Troika talks isn’t anything new and can’t fully explain the sell-off in euro. Stronger U.S. data pushed EUR/USD down slightly, but the bulk of the move happened before the 8:30am numbers.

Instead, it’s the general sense of caution and worry that the Eurozone will slog behind the rest of the worry that is hurting demand for euros. Better than expected economic data has come out of the U.S., U.K. and China but Eurozone data surprised to the downside. The Eurozone faces a challenging period ahead as continued austerity hamper future growth. Six months from now, we could find ourselves in a position where the U.S., U.K. and Chinese economies gain momentum and Europe remains stuck where they are now.

Kathy Lien
Managing Director

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