Why the Turn in the Euro May Be For Real

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Market Drivers for May 9 2014

Chinese inflation gauges muted

German Trade deteriorates

Nikkei .25% Europe -.51%

Oil $101/bbl

Gold $1290/oz.

Europe and Asia:

CNY CPI 1.8% vs. 2.0%

CNY PPI -2.0% vs. -1.8%

EUR GE Trade Balance 14.8B vs. 16.9B

GBP UK MP/IP 0.5% vs, 0.3%

GBP UK Trade -8.5B vs. -9.0B

North America:

CAD Unemployment 08:30 AM

GBP GDP Estimate 10:00 AM

It been a quiet night of trade in the currency market on the last day of the workweek, but EUR/USD continued its slide nearing the the 1.3800 figure after disappointing German Trade balance figures added to the selling pressure on the unit.

The euro staged a major reversal yesterday in the wake of Mario Draghi’s comments that the ECB was comfortable with taking action at the next meeting in June. The market took that comment as clear signal that the ECB was preparing for a possible rate cut as well as other non-standard measures to increase credit and economic activity in the region. The euro sold off heavily in the aftermath of the presser and for now at least the ECB has achieved its goal of keeping the exchange rate below the key 1.4000 mark.

The importance of the high EUR/USD exchange rate was evident in today’s German trade balance numbers which missed their mark printing at 14.8B versus 16.6B eyed. Exports were off by -1.8% versus 1.0% expected increase. Imports were also lower at -0.9% versus 0.5% projected gain. The numbers clearly suggest a slowdown in the Germany’s export engine which remains the key driver of growth for the whole EZ economy. Therefore it is not surprising that ECB has finally decided to tackle the issue of EUR/USD appreciation, as waiting any longer could have threatened the nascent EZ recovery.

While many euro bulls remain convinced that yesterday’s price action was a mere bump in the road on the eventual path to 1.4000, we are much more circumspect of the euro bull case. Even with a dovish Fed and a very low yield US bond market – both of which have been key drivers of euro appreciation over the past month – the latest signal by the ECB would create a more negative interest rate differential dynamic between the euro and the greenback that could finally direct capital flows toward the dollar. This would be especially true if the ECB moves to negative rates which could have a significant impact on investor behavior.

For now the euro is content to find support at the 1.3800 level and it may consolidate its losses in the 1.3750-1.3800 region for the next several days, but if US data continues to show general strength the downward pressure on the euro is likely to escalate and the pair could eventually drift towards the 1.3500 level.

With no US data on the docket today, the focus will be on Canada which releases its employment figures at 12:30 GMT. The expectation is for a decline to 12.9K jobs from last months whopping 42.9K gain. However, even a more modest number could prove supportive for the loonie as it would indicate that economic growth in the Great White North has picked up alleviating the need for BOC to ease monetary policy further. The loonie has rallied significantly over the past few months and any positive surprise today could send USD/CAD below the 1.0800 level.

Boris Schlossberg
Managing Director

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