Euro Bounces on Short Covering, But Prospects Gloomy

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Market Drivers for October 6 2014

Kiwi drops on Fonterra ban in Sri Lanka but recovers losses

GE Factory orders sink -5.7%

Nikkei 1.16% Europe .92%

Oil $90/bbl

Gold $1194/oz.

Europe and Asia:

EUR Retail PMI 44.8 vs. 45.8
EUR Sentix Sentiment -13.7 vs. -11.8

North America:

CAD Ivey PMI 10:00

The economic data from Europe was all negative tonight but EUR/USD shrugged off the dour news and rose nearly 50 point off Friday’s lows as short covering was the primary story on the first trading day of the week.

After another heavy bout of selling in the aftermath of Friday’s better than expected NFP data the EUR/USD found a modicum of support ahead of the ley 1.2500 level and not even the steady drumbeat of disappointing economic news could stop the bargain hunters from propping up the unit in morning European trade today.

The economic data from the region was horrid with German Factory order, Retail PMI and Sentix investor sentiment survey all hitting fresh lows. German factory orders contracted -5.7% versus -2.4% eyed – the worst performance since April 2009 as geopolitical concerns have clearly weighed on demand. German ministry noted that the data may have been distorted by late school holidays, but it nevertheless shows that manufacturing growth in EZ largest economy is likely to slow to a crawl this quarter.

In the retail sector, consumer demand fell further into contractionary territory in both Germany and France with only Italy ekeing out a slight improvement over the period prior. The overall Retail PMI printed at 44.8 – well below the 50 boom/bust line as demand remains anemic.

Finally the Sentix investor sentiment survey sank to its lowest reading since May 2013 printing at -13.7 vs. -11 expected. The weak reading suggests that investors see few opportunities for growth in the region which appears to be sinking back into a recession once again.

The news is only likely to embolden Mario Draghi is his attempts to expand credit and stimulate demand in the region despite opposition from German and Austrian central banks. Although Mr. Draghi faces a divided governing council in his proposal to enact an ABS/covered bond purchase program, the latest round of economic data from the region suggests that ECB cannot stand still much longer as conditions are clearly deteriorating and growth is likely to turn negative in the EZ if no monetary accommodation is made.

With no economic data on the docket in North American session, the currency markets may continue to consolidate with some further profit taking in the dollar giving a boost to EUR/USD as the day proceeds. However the pair remains a sell on rallies on trade as the divergence between US and EU growth prospects shows no signs of narrowing any time soon.

Boris Schlossberg
Managing Director

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