The way the EUR is flying at the moment, and with the ECB due to meet next Thursday; a rate cut may not be imminent. The single currency has found an extra pair of lungs after it broke through that option barrier ‘of strength’ at 1.36. It is currently trading at or close to a 14-month high. Further easing is expected to follow if the euro-zone exports starts struggling under the weight of a strong domestic currency.
It will not be a surprise to see this market become fixated, between here and next Thursday, on whether Draghi mentions the EUR strength as a cause of concern or not. If he does not “it could add to the currency’s tailwinds in an environment of intensifying currency wars.”
A number of reasons are being attributed to why the EUR currently sits on such a lofty perch. The most obvious being the sharp yen devaluation and the wider concerns about competitive devaluations have managed to spillover to the EUR strength outright and on the crosses. Even this morning, investors are cheering on the euro areas manufacturing data. Confidence in the European banking system has also been boosted in recent weeks as some European banks agree to payback their three-year LTRO loans two years early to the ECB. This will help to reduce the debt on the central banks balance sheet.
As indicated, upbeat euro manufacturing data has improved investor’s mood ahead of the "granddaddy" of economic indicators, non-farm payrolls. This morning, Swiss manufacturing activity rose to an 18-month high in January, and managed to post the country’s fourth consecutive monthly gain.
In the periphery’s, Spanish activity rose to 46.1 last month from 44.6. The eurozone as a whole managed to come out ahead at 47.9 in January, beating expectations of 47.5. Despite Spanish activity toiling below the 50-break even level for nearly two-years, the country is at its highest level in nearly the same time period.
The improvement in the eurozone’s manufacturing reading was largely due to a better reading from Europe’s economic backbone, Germany. It was here that activity managed only to slow marginally. The country produced an index reading of 49.8-the highest in nearly a year.
Not as lucky, but certainly not bad, was the activity in British factories. It continued to increase last month, acknowledging that the U.K.’s manufacturing sector has made a positive start to 2013, but at a slower pace. The PMI from the manufacturing sector slipped to 50.8 from a downwardly revised reading of 51.2 in December. It’s worth noting that the U.K. manufacturing sector ‘only’ accounts for +10% of the U.K.’s economy, so fears of a triple dip recession remain valid.
Asia overnight managed to deliver some mixed messages. Official manufacturing PMI fell to 50.4 from 50.6 in December, weaker than the 51.0 consensus, amid a change in the sampling size. The January print includes responses from +3000 companies, a substantial increase from the usual + 820 sampling. There was also a problem with the timing of the Chinese New-Year in February. Analysts note that it could create “an extra layer of seasonality.” Despite the miscues, the data seems to support strength in domestic demand, indicating further acceleration perhaps.
Market focus is clearly on non-farm payrolls now that we have last month's-end shenanigans squared away. Consensus seems to leaning towards a stronger print of +175k in January. This would be very much consistent with the improvement in labor market conditions suggested by jobless claims and the last ISM employment indices. If NFP hit target it would best the average pace rate of +155k per month in Q4. No one expects any deviation from the +7.8% unemployment rate at the moment.
A tad later, the U.S. comes under the ISM manufacturing survey microscope. The market seems to be anticipating a small pullback in the headline measure to 50.0, sitting in no man’s land of contraction or progress, from 50.7 in December. This would be consistent with the number of softer readings from a few regional Fed heads. None of this data would ever sway the Fed’s thinking.
The EUR weekly longs still look in good shape ahead of the NFP release as spot continues to make fresh highs. The techies are now beginning to indicate that the day indicators are in danger of being overbought. The 61.8% fibo of the 2011/12 decline remains above the 1.38 print for now. This too is the markets first real technical target, as resistance between here and there seems very limited. The market would be wise to raise their stops to below yesterday’s low. It’s not worth losing the entire hard-earned move!