EUR/USD Drops tp 1.2900 as PMIs Show Further Weakness

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Market Drivers March 21, 2013
ECB to suspend Cyprus help Monday if agreement not reached
EZ PMIs plunge further into contraction signaling region wide recession
Europe -0.84% Asia -1.34%
Oil $92.88/bbl
Gold $1606/bbl

Europe and Asia:
JPY Merchandise Trade Balance Total -1.09T
JPY All Industry Activity Index -1.4% vs. -1.1%
NZD Credit Card Spending 4.7% vs. 0.5%
CHF Trade Balance 2.10B vs. 1.87B
EUR German PMI Manufacturing 48.9 vs. 50.8
EUR German PMI Services 51.6 vs. 54.9
GBP Retail Sales 2.1%
GBP Public Finances
GBP Public Sector Net Borrowing 4.4B

North America:
USD Initial Jobless Claims 6:30
USD Markit US PMI Preliminary 6:58
USD House Price Index 7:00
USD Philly Fed 8:00
USD Existing Home Sales 8:00
USD Leading Indicators 8:00

The EUR/USD dropped below the 1.2900 mark in morning European trade today in the wake of much weaker than expected flash PMI readings and the continued turmoil in Cyprus where banking crisis remained unresolved. The ECB gave Cyprus notice that its will only support the banking system until Monday putting further pressure on officials to come up with a solution by the weekend. Meanwhile the Russians have shown no interest in extending further loans to Cyprus, leaving finance officials there with few options to resolve the matter.

While the crisis in Cyprus continued to simmer the news on the economic front remained bleak. The EZ flash PMI readings which are the most recent gauge of economic activity showed a sharp decline sinking further into negative territory below the 50 boo/bust level. PMI Manufacturing dropped to 46.6 from 48.2 expected while PMI Services declined to 46.5 from 48.2.

What was perhaps most troubling about tonight’s data was the sharp deterioration of conditions in Germany which up to now was the bulwark of EZ economy. In Germany PMI Manufacturing slipped to 48.9 – dipping into contractionary territory for the first time since January while PMI Services declined to 51.6 from 54.9. The news signals that the EZ wide recession is likely to continue and that Germany, which was seen as the locomotive of the region may now see a negative GDP in Q1 of 2013 as well.

As a result the EUR/USD remains under pressure but so far has been able to hold the key 1.2850 support despite the preponderance of bad news that surrounds it. It appears that the currency markets continue to hope for some sort of definitive resolution of Cyprus banking crisis, but with time running out under ECBs self imposed timeline, the downward pressure on the pair is likely to increase as we head into the week-end and the 1.2850 support line may tested if traders begin to believe that no solution is coming.

Despite Cyprus’s miniscule size, the EZ officials admitted that the collapse of it banking system could cause a systemic risk, especially if it translates into increased worries amongst other savers in the EZ periphery economies and triggers a bank run. For now the markets remain in a wait and see mode with EURUSD holding the 1.2900 level but volatility could increase sharply as the day proceeds and we see further headlines on the matter.

Boris Schlossberg
Managing Director

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