Will Euro Fail Again at 1.37?

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Daily FX Market Roundup 02-13-14

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management

Will Euro Fail Again at 1.37?
Dollar Weakness – Blame it on the Weather?
GBP/USD Hits Fresh Multiyear Highs
AUD: What an Ugly Jobs Number
CAD: House Prices Increase in December
NZD: Chinese Inflation Reports on Tap
USD/JPY Intraday Recovery Driven by Turn in Equities

Will Euro Fail Again at 1.37?

EUR/USD is closing in on 1.37, a level that the currency pair failed to clear 3 times this year. With Eurozone fourth quarter GDP numbers scheduled for release tomorrow, investors are wondering if this level will continue to cap gains for the pair or finally be broken. Based on the current consensus forecast, economists are looking for faster growth in the fourth quarter. However the sharp decline in German and French consumer spending towards the end of last year puts the odds in favor of a softer release. Most of the recent Eurozone economic reports including yesterday’s industrial production number indicate that the recovery lost momentum towards the end of the year. Yet an improvement in trade activity could help to soften blow in GDP and is one of the main reasons why economists are still looking for a stronger release. A good number would most likely drive EUR/USD above 1.37 especially after today’s weaker U.S. retail sales report. A contraction in growth on the other hand should push EUR/USD back down to 1.36 and remind everyone that the European Central Bank is still considering easier monetary policy as the Federal Reserve begins to unwind its stimulus program. We have also been watching the spread between German and U.S. yields very closely. Earlier this week, the EUR/USD declined as the spread grew more negative but today, 10 year Treasury yields fell more than the yield on German bunds in reaction to the soft retail sales report and this improvement in the yield spread lifted EUR/USD.

Dollar Weakness – Blame it on the Weather?

The U.S. dollar traded lower against most of the major currencies today on the back of a weaker than expected retail sales report. Despite the decline, the dollar enjoyed a very nice intraday recovery and based on the rally in stocks, it can even be argued that investors completely shrugged off the soft consumer spending report on the notion that it won’t change the Federal Reserve’s strategy to end QE by the end of the year. However based on the decline in Treasury yields, not everyone shares this view and until bond traders are convinced that the retail sales report is nothing to worry about, it may be difficult for USD/JPY to extend its gains above 103. Today’s retail sales report reminds us how much damage inclement weather can have on consumer demand and the economy. Everyone is blaming the weakness in retail sales on the weather but there’s no question that the slowdown in job growth in December and January also contributed to the contraction in demand. If economists are blaming the pullback in spending on inclement weather, then we can also attribute the market’s disappointment and the sell-off in the dollar to Mother Nature. USD/JPY dropped to its lowest level this week and GBP/USD climbed to multiyear highs on the back of the retail sales report but for the most part FX traders have taken the news in stride because weather has only a temporary impact on the economy. Nonetheless, if you ask any small business in the Northeast particularly restaurants and retailers, weather can have a very real impact on their bottom lines especially in a year like this one when the snow just keeps on falling. If there is another major snowstorm in the month of February we could be looking at less than 3% GDP growth in the first quarter. Retail sales fell 0.4% in the month January which was not only much weaker than anticipated but made worse by the sharp downward revision in December. Aside from falling for 2 months in a row, consumer spending contracted by the largest amount since June 2012. Excluding auto and gas purchases which can be volatile, core retail sales also fell 0.2%, the largest decline in 11 months. So as much as the Federal Reserve may be optimistic about the outlook for the U.S. economy and committed to continued tapering, they may have to slow the pace of reduction if retail sales and non-farm payrolls do not pick up soon. Jobless claims were also released this morning and they rose slightly from 331k to 339k. Industrial production and the February University of Michigan consumer sentiment report is scheduled for release on Friday.

GBP/USD Hits Fresh Multiyear Highs

The British pound climbed to fresh multiyear highs today after the disappointing U.S. retail sales report. There was no U.K. data released today so the move in sterling represents continuation after yesterday’s breakout. The Bank of England’s decision to drop its unemployment rate threshold and upgrade their growth forecasts should encourage further gains in the British pound as speculators reload their long GBP/USD positions. The next level of resistance for the currency pair is near 1.6740/50. As there are no additional U.K. or U.S. economic reports scheduled for release this week, we expect the currency pair to hold onto its gains. In the following week, there are a number of economic reports that will either validate or question the central bank’s decision to upgrade its GDP forecasts and the outcome will decide whether sterling will reach 1.70 versus the U.S. dollar. After the recent moves in U.K. and U.S. yields, 10-year Gilts are now offering a higher yield than 10-year Treasuries. If this spread continues to grow in favor of the U.K., we can expect further gains for the GBP/USD.

AUD: What an Ugly Jobs Number

Without the turnaround in risk appetite during the North American trading session the Australian dollar would probably be trading below 89 cents. Last night’s Australian employment report was very ugly. Not only did the country experience job losses for the third month in a row but he unemployment rate hit 6% for the first time since 2002. The participation rate held steady at 64.5% but only because last month’s reading was revised down from 64.6%. The data was overwhelmingly weak especially since economists were looking for a rebound of 15k jobs. While the Reserve Bank dropped its easing bias earlier this month, if labor growth does not improve and consumer confidence remains weak, they may have to revisit the idea of more stimulus. In the meantime however, investors have given the RBA the benefit of the doubt, which explains why the sell-off in AUD/USD has been so modest. This afternoon, RBA Assistant Governor Kent will be speaking and we are interested to see if he will downplay the recent employment reports. Meanwhile the New Zealand and Canadian dollars traded higher. House prices in Canada grew 0.1% in the month of December. Manufacturing and existing home sales are scheduled for release this evening but neither report is expected to have a significant impact on the loonie. We also have Chinese inflation numbers due for release but price pressures are not at levels that could prompt a reaction from the central bank.

USD/JPY Intraday Recovery Driven by Turn in Equities

The price action of USD/JPY today illustrates the influence of risk appetite and more specifically the movement in equities on currencies. After the disappointing retail sales report, USD/JPY dropped to a low of 101.69 as stocks pointed to a weaker open. However when equities started to turn around, so did USD/JPY, which managed to rise back above 102. The sell-off in Japanese stocks overnight did not help the Yen crosses, which are all struggling to regain momentum. For USD/JPY, 103 is the key level that the currency pair needs to break for the uptrend to be revived. The Domestic Goods Price Index was the only piece of Japanese data released overnight and according to the report, price growth slowed in the month of January. Tonight, the Ministry of Finance’s weekly portfolio flow report is due for release. The recent launch of tax-free investment accounts have and could continue to reduce Japanese demand for foreign stocks and bonds.

Kathy Lien
Managing Director

One thought on “Will Euro Fail Again at 1.37?”

  1. Kathy, you forgot to mention italian political crises in the mix. I was hearing some political uncertainty was spoiling the air between 10-11AM

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