Euro Sings The Blues

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Market Drivers for February 20, 2014
EZ Flash PMI miss estimates with France contraction deteriorating
China PMI misses with employment gauge weakening by worst in 5 years
Nikkei -2.15% Europe -1.03%
Oil $103/bbl
Gold $1313/oz.

Europe and Asia:
NZ PPI -0.7% vs. 0.9%
JPY Trade Balance -1.82T vs. -1.56T
CNY HSBC Flash Manufacturing PMI 48.3 vs. 49.4
EZ GE PPI -0.1% vs. 0.3%
EZ FR CPI -0.6% vs. -0.5%
EZ PMI Man. 53 vs. 54.2
EZ PMI Svc. 51.7 vs. 51.8

North America:
USD Weekly jobless 8:30 AM
USD Philly Fed 10:00 AM

Eurozone flash PMI data disappointed investors as it missed expectations and sent EUR/USD tumbling through the 1.3700 level in early morning European dealing. The EZ PMI came in weaker than forecast in both manufacturing and services sectors printing at 53 vs. 54.2 in the former and 51.7 vs. 51.9 in the latter.

The numbers out of Europe were particularly bad in France where the services PMI gauge sank nearly three points to 46.9 versus 49.5 eyed. French manufacturing also remained under the 50 boom/bust line printing at 48.5 versus 49.6 projected. The overall European data was essentially rescued by the German results which posted a 32 month high on the composite index with services PMI rising to 55.5 from 53.1 the month prior.

Germany continues to be the locomotive that is keeping the Eurozone from slipping into a recession, but that dynamic cannot last much longer unless economic activity in the periphery begins to pick up. Despite the weak data from France there were some rays on sunshine in the report with another marginal rise in the export orders and a jump in service providers confidence to a 23 month high.

Over the EZ PMI data contained just enough good news to cast doubt on any immediate easing action by the ECB and after dropping more than 60 points off the highs the euro consolidated around the 1.3700 level as markets awaited the opening of North American trade. Still, today report clearly shows that the economic recovery in Europe is tenuous at best and if activity does pick up soon, the ECB may have no choice but to consider negative interest rates to stimulate growth.

Elsewhere in Asia the Chinese HSBC manufacturing PMI also disappointed printing at 48.3 versus 49.4 as it recorded its second consecutive month in contractionary territory. Worse the employment component decreased at the fastest rate in 5 years suggesting that the slowdown may be more severe than the market thought. The Aussie immediately tumbled in reaction to the news hitting a low 8935 versus 9000 prior to the release.However the pair recovered some of its losses as the night progresses as traders speculated that the PMI data may have been seasonally depressed due to Lunar New Year holidays.

Seasonality is also likely to play havoc with US data as the unusually harsh winter conditions could impact economic reports including the weekly jobless claims and the Philly Fed due at 1500 GMT. The market is looking for 9.2 print on Philly Fed but there is strong possibility that that the data could miss given the impact of snow on the region last month.

For now currencies appear to have settled into an uneasy standstill as data around the globe continues to disappoint, but markets can not decide whether the run of bad numbers is due to one off weather factors or more serious secular problems with demand. USD/JPY continues to find support ahead of the 101.50 level but if US data shows no improvement that barrier could be tested again this week.

Boris Schlossberg
Managing Director

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