The expected euro depreciation against the USD started during the last week. The single currency lost almost 1.25% and finished the week at $1.3220 after touching briefly $1.3174 on Friday.
As mentioned in several of our recent editions of the "EUR/USD: The Week Ahead" review, market expectations about the FED's monetary actions, as well as the officials' rhetoric, continued to govern the EUR/USD movements. This time there is an added geopolitical factor - the possible war on Syria. This possibility and the rhetoric surrounding it were among the main reasons, which caused the USD to rise during the last week. We expect that it will continue to a considerable degree to govern the trading in the EUR/USD exchange pair for the next several weeks.
According to a Marketwatch article, the U.S. could try to strike Syria without much of international support. Until the vote on the strike which is expected to be held no earlier than the week of September 9, we expect there will be much rhetoric of this kind, both pro- and cons- war, which has the potential to present an increased volatility in the currency pair. Given a war is started, a flight to safe haven currencies and assets could be witnessed.
Technically speaking, the euro might try to recover some of its lost ground in the short term (Monday with its lack of economic data and a day-off in the U.S. seems like a suitable candidate for this) but the longer prospects for the single currency remain vulnerable. As of time of writing it trades around the $1.322 level, which is just below the 23% Fibonacci retracement level of the decline between the top at $1.3396 and the current low at $1.3174. If this level is surpassed, the next resistance could be around $1.3255/60 and then $1.3275/80. However, the daily graph still shows a downward direction with a bearish MACD divergence.
The Week Ahead
The most important risk events of the week are the U.S. ISM manufacturing PMI (Tuesday), the EU GDP and FED's Beige book (Wednesday), the ECB interest rate decision and ECB monetary policy and press conference (Thursday) and the U.S. non-farm payrolls and unemployment rate (Friday). Those have the potential to present an increased volatility in the EUR/USD exchange rate and determine the near-term direction of the pair. Another important but non-regular event of this kind is the danger of international war at Syria. It has the potential to increase the search for safe haven assets like USD, CHF, JPY or gold or hedging commodities like oil.
This week's analysts' optimistic expectations are a bit above the middle of the range (64%). This is about 45% higher than the previous week's optimistic expectations. Consensuses are more optimistic for the European data (75%) than for the U.S. one (56%), with the positive economic expectations for the U.S. increasing faster (144%) than the ones for Europe (31%). Generally, this would be in favor of the USD due to the current positive correlation between a positive economic data and the expectations of FED's tapering. The correlation between the last 4-week change in the overall optimistic expectations and the change in the EUR/USD rate for the respective weeks has been positive for the last five weeks and now is at .96. This is a rather high value, which presents room for surprises.
The index shows the proportion the positive consensus estimates take in all the estimates we have available for the respective week. A value above 50% represents an optimistic mood in the expectations rather than pessimistic. The weekly change in index's value could be used as a tool to assess the analysts' mood. It should not be neglected however that the EUR/USD rate actually moves rather on the real data and on how that data differs from the expected one.
Investors could take advantage of their own expectations about the EUR/USD exchange rate movement in order to hedge the positions they have in other assets. For instance, American investors with investments in euro denominated assets who expect that the U.S. dollar would appreciate against the single currency, could try to decrease the currency risk by selling euros or by opening a short position in an ETF, which tracks the price of the euro. CurrencyShares Euro Trust (FXE) is among the most widespread options here. It tracks only the price of the euro measured in U.S. dollars. This ETF has an expense ratio of 0.40%.
For those who prefer more diversified funds, among the options are the PowerShares DB USD Bullish ETF (UUP) and the PowerShares DB USD Bearish ETF (UDN). Both funds are U.S. dollar denominated and track the value of the USD against six other major currencies - euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. The funds' expense ratio is 0.50%.
Another option is to use the Barclays iPath EUR/USD Exchange Rate ETN (ERO). It is an ETN with an expense ratio of 0.40%. Its only holding is euro. Investors who believe the USD will continue to appreciate could take advantage of a short position in the ETN, and vice versa. Like all ETNs, ERO has some differences in taxation in different jurisdictions compared to an ETF. Readers are encouraged to consult a tax professional.
Those who are not feeling comfortable with or are not allowed to take short positions but still expect the euro to depreciate, could utilize a long position in the ProShares Euro Short ETF (EUFX). It tracks the inverse of the U.S. dollar price of the euro. This ETF is a commodity pool and as such has a slightly higher expense ratio (0.95%).
Monday, September 2
USA Labor Day
EU Germany Markit Manufacturing PMI (Aug)
EU Markit Manufacturing PMI (Aug)
Monday is non-working day in the U.S. so basically the participants from Europe and Asia would move the EUR/USD exchange rate. Any news regarding the conflict in Syria would be able to affect the market, most probably in a euro negative way. The Germany data is expected to be positive. Any negative surprise on that could move the euro higher on the premise that negative economic news might postpone the expected FED's tapering.
Tuesday, September 3
EU Producer Price Index (Y-o-Y) (Jul)
USA Markit Manufacturing PMI (Aug)
USA Construction Spending (Jul)
USA ISM Manufacturing PMI (Aug)
Tuesday's expectations for the economic data are mixed. Any significant increase (a positive surprise) of the producer price index in the EU would decrease the chances for a rate cut on behalf of the ECB later during the week. This would be euro positive.
Regarding the U.S. data the current interrelation is expected to continue - a positive data would mean a higher USD based on the expectations of a rather sooner than later decrease of the FED's policy of "easy money."
Wednesday, September 4
EU Markit PMI Composite (Aug)
EU GDP (Q2)
EU Retail Sales (Y-o-Y) (Aug)
USA Challenger Jobs Cuts (Aug)
USA Trade Balance (Jul)
USA FED's Beige Book
The expectation on the EU data is that each of the indicators will present better-than-previous values. Any negative surprise here would have the potential to lead to a euro appreciation.
It will be interesting to see if the U.S. Challenger jobs cuts will present a higher or lower value than the previous one. This data would relate to the possible level of the unemployment rate, which is expected to be released on Friday. In the current environment a higher-than-previous value could be USD positive.
During July the average EUR/USD exchange rate for the month was $1.31. This is about a cent lower than the June average rate ($1.319). Generally this would translate into a widening negative trade balance, as expected. A positive surprise here, expressed by a smaller figure, would be positive for the U.S. economy meaning that the appreciated USD does not harm the trade balance to the extent it would be expected to do it.
The Beige book would further reveal the FED's assessment of the U.S. economy. It could be able to give hints on the officials' intentions regarding the monetary policy.
Thursday, September 5
EU Germany Factory Orders (Y-o-Y) (Jul)
EU ECB Interest Rate Decision
USA ADP Employment Change (Aug)
EU ECB Monetary Policy Statement and Press Conference
USA Initial Jobless Claims
USA Factory Orders (Jul)
USA Non-Manufacturing PMI (Aug)
The most important risk events on Thursday are the ECB interest rate decision and its press conference later during the day. Market participants expect that the ECB will keep its interest rate intact. Given the current improving economic situation and the danger of a war in Syria (which could lead to a flight to safe haven currencies, including USD and CHF, thus hurting the value of the euro), leaving the rate where it is seems a reasonable and most probable decision. Moreover, the inflation data from Europe (falling inflation combined with decreases in M3 money supply and private loans) does not warrant an increase of the interest rate. Still, a surprising decrease of the rate would be strongly euro negative.
From the U.S. side, the jobless claims and factory orders are important indicators of the future economic development. Positive values there would be U.S. dollar positive.
Friday, September 6
EU Germany Trade Balance (Jul)
EU Germany Industrial Production (M-o-M) (Jul)
USA Nonfarm Payrolls (Aug)
USA Unemployment Rate (Aug)
A positive surprise on the Germany industrial production would be Germany positive but could weigh on the euro due to the current positive relationship between a good economic data and the expectations of a FED's tapering.
The same is valid for positive economic data released from the U.S. Hence, a negative surprise on the non-farm payrolls could put some weight on the USD.
Additional disclosure: I might initiate a short euro position in the next 72 hours.