Momentum Rests With The EUR Bear

by: Dean Popplewell

Signs that a U.S. led military strike on Syria may be delayed are having a positive effect on one or two of the asset classes. Global equities are trying desperately to emerge from the shadows and nudge higher, while the “mighty” dollar is gathering renewed support on the back of higher Treasury yields. Comments from the White House yesterday have calmed capital markets considerably. With Syria perhaps on the back burner for the time being, investors seem willing to focus on market fundamentals for direction. No matter, investors should expect rumor and innuendo to again rear its ugly head at a moment's notice – insanity is only moments away.

The euro bourses continue to trade higher this morning despite data revealing that Germany’s unemployment headline unexpectedly advanced +7k this month, leaving the country’s jobless rate steady at +6.8% in Europe’s largest economy. The harmonized unemployment rate fell to +5.3% in July from June’s +5.4%. The country’s total unemployment rose by +32k to +2.946m people in unadjusted terms in light of “the ongoing summer break”.

Even in the midst of Berlusconi’s political and personal shenanigans, Italian consumer confidence rose further this month, rising to 98.3 from 97.4 in July. The general uptick was driven mostly by improved sentiment about the general economic climate from the eurozone's third largest economy. However, not considered at all surprising was that the outlook for employment deteriorated somewhat, with almost +25% of the population expecting a “strong increase.” Despite the government expecting Italy’s recession to “soften” and even “reverse” the country’s labor market remains troubled. Other data showed that consumer confidence was higher across most of the country, especially in the industrial northeast. However, consumers reported a sharp drop in their intention to buy durables and an increase in their intention to save more.

Currently, the ECB is focused on “lower for longer,” same message as the BoE’s Governor Carney. However, slow money supply, an inflation rate below that elusive +2% and an uninspired eurozone economic recovery thus far, together with “a broken transmission mechanism,” would somehow suggest that euro policy makers should be thinking about delivering further monetary easing now rather than later. So far, both the ECB and BoE feel comfortable looking at “forward guidance” to prevent higher rates. However, Draghi and Carney are certainly not "cut from the same cloth."

BoE’s Carney is at least prepared to inject fresh stimulus, especially if rising global rates threaten the U.K.’s fledgling economy. Carney speaking at a conference yesterday dismissed raising the BoE’s benchmark rates any time soon – the benchmark is to stay at +0.5% until UE is +7%.

Other data yesterday showed that euro private sector loans were falling at the fastest pace since the EUR’s inception (-1.9%). This again highlights the risks to the euro-region's growth outlook despite upbeat Q2 GDP data and recent PMIs. Perhaps euro policy makers will continue to rely on their “traditional” non-standard financing methods, like the Long Term Refinancing Operation program, rather than injecting fresh stimulus to promote even sustainability.

Maybe it's time for Draghi to let down the EUR bulls? Similar to many other times, traders tend to speculate well in advance to an ECB meet and next week’s is no different. It looks like many had been anticipating that Draghi to do or say something “dovish” – they have not and this has led to some of recent EUR short squeeze higher. Some analysts are speculating that given the EUR’s current level that Draghi may yet get to comment on FX next week. Futures data indicated that EUR longs are near their highest point this year, only one week before the next central bank meet. Maybe rising U.S. yields and the threat they pose to the peripheries could lead Draghi to comment, in effect talk the EUR down as a proxy to easier monetary policy.

Aiding the EUR sell-off this morning is the apparent talk of a large month-end demand for dollars. Real money funds have been strong buyers of USDs across the board on the back of higher interest rates. Any further Middle East antics could very much turn the EUR submission into another runaway currency. There is some stability around the touted option related level of 1.3250 for now. New offers are now lining up ahead of 1.3300. So far, momentum rests with the bears while the speculators remain long EURs. Investors will be closely watching U.S. GDP and weekly jobless claims for further clues on the Fed’s timeline to begin tapering.

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