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10 Things All Must Watch

Regardless of your opinion about the EUR, USD, the EUR/USD, or other related EUR or USD pairs, there's little doubt there will be volatility. However the coming week is much more than just a news trader's week.

  1. We have at least two if not four new brewing sources of short- and long-term EU crisis anxiety.

  2. We have the U.S. monthly jobs reports. These are usually market moving, and now they're coming at a particularly sensitive time.

  3. We have four major central bank meetings and rate statements, at least one of which (BOJ) has been anticipated since mid-November and is expected to announce new easing, two of which are heading towards new stimulus at some point and so a surprise cannot be ruled out (ECB and BOE).

  4. We have the unofficial start of U.S. Q1, and thus at minimum some speculation and positioning ahead of the official start, Alcoa's earnings announcement, which is due April 8th.

Here's an overview of these and other likely EUR/USD drivers this week.

FUNDAMENTAL PICTURE

We discuss most of the below market drivers in greater detail here.

EU

Here's a quick overview of EUR/USD market movers for the coming week and beyond from the EU.

1. - 2. French, Italian Bond Auctions Thursday: Unclear Effect On The Pair

Both nations are selling benchmark 10 year notes. EU crisis watchers use bond auctions as gauge of EU crisis anxiety, similar to how the VIX index is used for U.S. stocks.

1. Italy

As we noted in more detail here, the Italian sale could be particularly interesting. Because of Italy's systemic risk (#8 in the world, #3 in Europe in terms of GDP ahead of India, Russia, Canada, Australia, among others), the EU does all it can to insure a decent looking auction. However Italy has been showing some attitude to the EU as of late, and so may need some reminding to behave itself. Spiking bond yields were what drove the last PM from office, so bond markets could again be used against Italy. A poor auction would spike EU concern and hurt the EUR and thus the EUR/USD (currencies move up or down with the base currency, the one on the left).

2. France

France has been like the U.S. of Europe in the sense that its data hasn't been great but it still looks good relative to the rest, so its bond yields have remained low despite ongoing economic contraction and banking system that deeply exposed to the GIIPS. France has a GDP of about $2.5 trillion. For example, French banks have about $400 billion of Italian debt alone, about 16% of French GDP, and about $144 billion of Spanish debt, about another 5.7% of French GDP.

3. - 4. Growing Contagion Fears: Bearish Longer Term, Short Term Unclear For the EUR/USD

  • Cyprus: The current regime of capital controls is officially slated to last seven days; however they're widely expected to remain in place for at least the coming months. The longer they stand, the deeper the damage to confidence in the safety of GIIPS-C (GIIPS plus Cyprus) (or GIIPS-CS if we include Slovenia) deposits. The EU claims the Cyprus deal was unique, but as FT's Wolfgang Munchau correctly points out here, that's true only in a narrow legal sense. The second Greek bailout's ~90% haircuts to Greek bondholders in the spring of 2012 already set the precedent for private sector "participation" (and also set in motion the Italian crisis of that summer on contagion fears, and the current Cyprus crisis due to Cyprus bank exposure to those same bonds - real contagion - but never mind).
  • Slovenia: As mentioned in our post here, Slovenia is the next big expected crisis hot spot. Its bond yields are up about 40% in the past two weeks due to all of the unpleasant similarities between it and Cyprus. As noted below, given the political needs of German leaders, this isn't a good time to be seeking EU aid.

5. Italian Politics: Bearish For the Pair

After last week's failed attempt at forming a coalition in Italy, the President is expected to appoint a caretaker government that will likely end in new elections in the coming months, keeping political uncertainty hanging over Italy.

6. German Politics: Bearish For The EUR/USD

Germany's September elections mean its leaders must show added firmness in future EU bailouts. Ask the Cypriots about that.

7. EU Data: Neutral/Bearish

A batch of EU PMI sentiment surveys provide the latest look at the ongoing contraction throughout almost the entire EU except for Germany. Expectations are low, but can even those be met?

There are also inflation reports for Germany and the EU. Inflation is expected to remain quiet, and it needs to stay that way in order to allow the possibility of more stimulus if needed. If inflation does pick up, Germany and other hard money funding nations will be even less likely to support new easing until after German elections this September.

8. ECB Meeting: Neutral/ Bullish

No changes expected at this time, but things have gotten worse since last month's meeting, so we wouldn't be surprised to hear Draghi sound more pessimistic and offer at least some reminder of future easing.

U.S.

9. Monthly Jobs (And Related) Reports: Neutral/Bearish For The Pair

Unless the U.S. monthly job figures badly disappoint markets, the employment situation still looks almost utopian compared to that of the EU, especially if you pull out Germany. As we discuss more here, if we get a second straight month of over 200k new jobs, that alone could start markets speculating about an earlier than expected reduction of QE 3, and would be very bullish for the USD, and hence very bearish for the EUR/USD.

10. TECHNICAL PICTURE: Short Term Unclear, Longer Term Bearish

Given the sharp downward momentum, and amount of bad news already out, you can argue for a short-term bounce in the pair. Sentiment also looks oversold, but of course that can continue and isn't of much predictive value.

Unlike the S&P 500, however, the EUR/USD's momentum has all the fundamental support you could want, so we're confident in that the second leg of the EUR's secular bear is still intact. We'd hesitate to put in new shorts, however, until we get a bounce back into the $1.3150 area, where we've resistance from:

  • The 38.2% Fib retracement level

  • The 50 (red), 20 (yellow) and 10 (blue) week EMAs

(click to enlarge)

WEEKLY EUR/USD CHART MID 2010 - PRESENT

Source: MetaQuotes Software Corp, thesensibleguidetoforex.com

One Thing's Clear

The U.S. is actively debasing the USD, Japan is expected to start its own new easing this week, and it's a matter of time before the ECB and BOE do the same. That's bad news for anyone whose wealth is tied to these currencies, and makes diversifying your exposure away from them all the more important. That doesn't have to be any more risky or time consuming than your current preferred mode of investing or trading.

Disclosure: No positions.

Disclaimer: The above is for informational purposes only. All trade decisions are solely the responsibility of the reader.

Source: EUR/USD Weekly Outlook: Top 10 Market Drivers This Week