Will ECB Drive Euro Lower?

Posted on

Market Drivers for May 2, 2013
Euro very quiet ahead of ECB
Aussie continues to slide on concerns over China growth
Nikkei -0.76% Europe -0.01%
Oil $91/bbl
Gold $1454/oz.

Europe and Asia:
CHF SVME PMI 50.2 vs. 49.1
EUR ECB Rate Decision n/a
EUR ECB Deposite Facility Rate n/a
EUR Euro-Zone PMI Manufacturing 46.7 vs. 46.5
GBP PMI Construction 49.4 48.1

North America:
USD Trade Balance 8:30
USD Initial Jobless Claims 8:30

It’s been a predictably slow night in the currency market with EUR/USD tracing out a narrow range ahead of the ECB decision at 1100 GMT later today. The eco data showed that Manufacturing activity in the Eurozone continues to implode with final EZ PMI Manufacturing reading coming in at 46.7 versus 46.5.

Although the reading was marginally better it remains well below the 50 boom/bust mark and shows that the sector is now in recession even in Germany. Perhaps the only positive takeaway from today’s numbers is that the rate of contraction has slowed indicating that demand may be leveling off.

The tough economic conditions in the Eurozone have put enormous pressure on the ECB to lower rates at today’s meeting. Although few market observers believe that the rate cut will have any significant stimulatory impact, it is viewed as better than nothing. As recent CPI data has shown, the region is effectively in a deflationary spiral and ECB must try to spur demand in any way possible.

The key unknown ahead of today’s meeting is whether Mr. Draghi will announce any other policy changes such as relaxation of collateral rules in order to spur lending to SME businesses in the periphery region. Despite the low interest environment credit conditions for small and medium size businesses in the region remain tight and are contributing to the overalll slowdown in economic activity.

Given ECBs generally cautious nature however, it remains doubtful if Mr. Draghi will make any dramatic announcements today and that could result in sharp selloff in the EUR/USD if investors are disappointed with his words. The recent rally in the pair had been driven much more by anti-dollar flows rather than any organic demand for the unit and today’s meeting could prove to be a telling sign of just how much support the single currency has in the market right now.

Meanwhile, the economic slowdown theme is also starting to gather momentum in Asia with the latest Chinese PMI data showing further decline to 50.4 from 50.5 the month prior. The weakness in the AUD/USD continued with the pair breaking below 1.0250 mark to hit a low of 1.0221. Markets are becoming concerned that Chinese GDP will miss its forecast signaling further slowdown for the heavily dependent Australian economy.

Lastly USD/JPY continues to stubbornly hold the 97.00 figure despite the fact that US growth has clearly slowed and yesterday’s confirmation of further QE by the Fed. There is talk in the market of large Do Not Touch 97/104 option barrier in the pair that has been propping the price for the past several days. However, the downside pressure continues to increase as US data is has shown nothing but negative surprises for the past several weeks. That 97.00 level therefore is very vulnerable to a break, especially if tomorrow’s Non-Farm payrolls report disappoints.

Boris Schlossberg
Managing Director

Leave a Reply

Your email address will not be published. Required fields are marked *