Euro Hits Multi-Month Lows

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Market Drivers December 3, 2014

Euro drops to 1.2325 as 2350 support gives way
UK PMI Services better by 2 pts but cable struggles to rally
Nikkei 0.32% Europe .31%
Oil $67/bbl
Gold $1204/oz.

Europe and Asia:
AUD GDP 0.3% vs. 0.7%
EUR EZ Final Svc PMI 51.1 vs. 51.3
UK Services PMI 58.6 vs. 56.6
EUR Retail Sales 0.4% vs. 0.6%

North America:
USD ADP 8:15
USD ISM Non- Manufacturing 10:00
CAD BOC Rate Decision 10:00

The euro hit fresh multi month lows in early morning European trade today after breaking the key 1.2350 support level and triggering an avalanche of stops that took it down all the way to 1.2322. There was no significant news out of the Eurozone but several large banks including UBS have lowered their targets on the unit now calling for 1.1500 exchange rate on the prospect of massive QE program in the region expected to commence early next year.

On the economic front the final Services PMI data was mixed with both France and Germany showing downward revisions from the earlier flash estimates, but the headline number managed to stay above the 50 boom/bust line coming in at 51.1 versus 51.3 forecast. EZ Retail Sales also missed slightly printing at 0.4% vs. 0.6% eyed.

The eco data from the region continues to suggest that growth in the EZ is at a near standstill and the pressure on the ECB to act is almost relentless, but ECB President Mario Draghi still faces opposition from Germany and traders will be watching this Thursday’s ECB meeting very carefully for any hints that the central will pull the trigger on a rumored 1 Trillion QE program sometime in Q1 of 2015. Any oblique confirmation of that thesis could send EUR/USD below the 1.2300 figure and perhaps as low as 1.2200.

Meanwhile news out of UK was a bit more upbeat with UK PMI Services beating forecasts by 2 points as the headline rose to 58.6 from 56.6 eyed. The employment component rose to 55.8 from 55.6 forecast – the best reading since July. UK continues to outperform Europe by a vast margin and EUR/GBP is starting to reflect this fact as the pair hit a low of 7870 in mid morning trade today on both growth and yield differentials.

Yet despite relatively robust UK economic data, BoE remains reluctant to make any move on rates in the first half of 2015 as wage growth and price pressures remain subdued. Indeed the massive decline in energy costs which has had a pronounced effect on prices across the board has provided G-10 central banks with plenty of cover to maintain accommodative policies for far longer than was prudently possible. Cable rose slightly in the aftermath of the news, but the reaction was tepid given the muted expectations on UK rates.

Lastly in Australia the GDP data came in much worse than expected printing at 0.3% vs. 0.7% forecast. Both government spending and mining declined sharply and those trends are likely to continue given the slowdown in demand from China. The current pace of growth now opens up a very real prospect of an RBA rate cut, especially if the Aussie does not decline towards the 8000 rate in the near future. The pair dropped a half cent in reaction to the news but found support at the 8400 barrier.Despite the economic woes at home, the Aussie remains the premier carry trade in the G-10 universe and with yields everywhere else shrinking it continues to find buyers amongst the yield hungry investors.

In US the calendar picks up steam today with both ADP and ISM Non-Manufacturing data on tap. The focus on the market will be on the employment data in both ADP and ISM subcomponent with markets keen to confirm that US economy is on track to post another 200K monthly gain. If the data come in as expected it may push EUR/USD through the 1.2300 figure and could even squeeze USD/JPY shorts through the 120.00 level but if it misses, the overnight gains made by the buck could quickly reverse as markets begin to fear the onset of slowdown in global growth.

Boris Schlossberg
Managing Director

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