The EUR/USD Squeeze

Posted on

Daily FX Market Roundup 07-03-12

The EUR/USD Squeeze
USD: Counting Down to Payrolls
GBP: More Evidence of Weakness in Housing
AUD: No Changes to Monetary Policy, Neutral Bias
CAD: Oil Up 4 Percent
NZD: Hits Fresh 1 Month High
JPY: Political Uncertainty Pressures the Yen

The EUR/USD Squeeze

While it has been an extremely quiet trading with nearly all of the major currencies consolidating against the U.S. dollar, everyone cannot stop asking about the intraday squeeze in the EUR/USD. The currency pair jumped from 1.2570 to 1.2600 in a manner of minutes and extended its gains to 1.2627 before the end of the European trading session. There was little movement during the second half of the North American session, which tells us that most U.S. traders left early for the holiday. U.S. markets will be closed on Wednesday for the July 4th Independence Day holiday. Currency markets will remain open but with lower volatility and thinner trading volumes. The short squeeze in the euro reflects pre-holiday and pre-ECB repositioning by EUR/USD traders. According to last week’s CFTC IMM data, speculators remain very short euros and today’s price action tells us that many of them do not want to hold their shorts ahead of the ECB meeting. This is interesting because economists are looking for a rate cut from the ECB. Believe it or not, a rate cut could actually be positive for the euro but we’ll explain that in more detail in our ECB/BoE preview that we will release on Wednesday.

Meanwhile the persistent decline in Spanish and Italian bond yields provided some support to currencies and equities. Eurozone producer prices were released this morning and the latest data showed prices falling 0.5 percent in May and the decline in inflationary pressures means these central banks can increase monetary stimulus without boosting prices to unsustainable levels. Final Eurozone PMI numbers will be released on Wednesday along with Eurozone retail sales figures. Weak spending in Germany and France points to softer spending in the region as whole. It should be another quiet trading day with any volatility concentrated in the European trading hours.

USD: Counting Down to Payrolls

The only piece of U.S. data on the calendar today was factory orders and while there was a nice increase in the month of May, the impact on the U.S. dollar was nominal. With North American traders thinking about nothing other than barbeques and fireworks, the dollar traded lower against all of major currencies except for the Japanese Yen. Once traders return from their holidays on Thursday, the focus will quickly shift to Friday’s non-farm payrolls report. On Thursday, the non-manufacturing ISM index will be released which is one of our favorite leading indicators for NFP. The employment component of service sector ISM declined sharply in April and May, which correctly forecasted the pullback in job growth during those months. If this index fails to rebound on Thursday, it will be hard to believe that payroll growth accelerated. Economists are looking for 90k new jobs in the month of June, up from 69k in May. The ADP employment change and Challenger job cuts reports will also be released after the holiday. All these numbers will help to craft the market’s expectations for NFPs. Based on the recent price action of the U.S. dollar, investors don’t have high expectations for job growth and correctly realize in our opinion that unless more than 150k jobs were created last month the Federal Reserve will still be hard pressed to increase asset purchases later this year.

GBP: More Evidence of Weakness in Housing

Unlike other major currencies, the British pound did not enjoy a rally against the U.S. dollar and actually weakened against the euro. Disappointing economic data held the currency pair back and reinforced the possibility of further easing from the Bank of England. For the first time in 1.5 years, construction activity contracted at its fastest pace since December 2009. Mortgage approvals also declined along with net lending on securities dwellings. All of these numbers tell the same story of renewed weakness in the U.K. housing market. Banks have been reluctant to lend and consumers have been reluctant to borrow. In fact recent data also showed net mortgage lending declining for the first time in 15 years as cautious consumers use the discretionary income to reduce debt in case the economic outlook worsens in the coming months. BRC Shop prices and PMI Services are due for release tomorrow. With manufacturing activity contracting at a slower pace and construction activity contracting for the first time in 1.5 years, service sector PMI could be the decision maker for the Bank of England. While growth has been slow, service sector activity has been in expansionary mode since January 2011.

AUD: No Changes to Monetary Policy, Neutral Bias

The Australian, Canadian and New Zealand dollars traded higher against the greenback following stronger than expected economic data from China and Australia. Chinese non-manufacturing activity grew at a faster pace in June while Australian building approvals surged 27.3 percent in May. Permits rose at record breaking levels, providing support for the Reserve Bank of Australia’s decision to keep interest rates unchanged at 3.5 percent. The tone of the RBA was fairly neutral with the central bank expressing concerns about the international outlook but offsetting it with a slightly upgraded onshore assessment. The RBA has long felt that their economy was doing better than the global economy and enough so that RBA Governor Stevens said last month that “Australia’s glass is at least half full” and Deputy Governor Debelle said last week that the Australian economy is in a “good place.” Today, the RBA admitted that domestic growth was somewhat stronger than earlier indicated, which is upgrade from their previous assessment. Australian retail sales and service sector PMI numbers will be released this evening following by HSBC’s Chinese Services PMI report.

JPY: Political Uncertainty Pressures the Yen

Overnight trading was quiet with most major currency pairs confined in a tight range. The biggest action was in the Yen crosses and USD/JPY in particular. Political stress is keeping the Yen under pressure with the widely unpopular consumption tax pushed forward by Prime Minister Noda prompting the submission of resignation letters by 36 lawmakers. While some newspapers in Japan argue that the removal of his DPJ archrival Ichiro Ozawa has brought relief to Noda who can now push forward with an agreement with the 2 opposition parties, political uncertainty is never good for a country’s currency which explains part of the reason why the Yen has performed so poorly on this quiet day. Vehicle sales and labor cash earnings were the only Japanese economic reports on the calendar and both numbers surprised to the downside, showing further weakness in Japan’s economy.

Kathy Lien
Managing Director

Leave a Reply

Your email address will not be published. Required fields are marked *