Where's The Party? EUR Remains In A Slumber

by: Dean Popplewell

Investors should be thankful of another disappointing overnight job's report. The Aussie employment situation has managed to keep market volatility alert in various cross currency pairings -- certainly in stark contrast to what is transpiring with the 18-member single currency. The EUR's outright flow is somewhat distorted as the bulk of the directional currency action has been held captive by the myriad of EUR cross-flows. Any significant market moves have been few and far between and this despite investor risk appetite improving in the various asset classes. Risk has reappeared specifically amongst the euro peripheries where fixed income spreads have improved significantly, especially between Portugal and Germany. Their yield spread has managed to tighten -2.5bps to the bund where outright 10-year product has broken last year's low point at +5.21% this week, an area that has not been seen in nearly three years.

The Aussie dollar has fallen to a new multi-year low on a sharp decline in domestic employment (-22.6k vs. -10k). The Australian unemployment rate has remained unchanged at +5.8%, but only because of declining participation rate, which fell -2bps to 64.6%; a 7-year low. The decline in employment effectively brings back the possibility of further RBA easing, particularly as some of the more recent housing data show signs of deceleration. The currency's failure to overcome its 50-DMA at 0.9070 earlier this week and the subsequent breach of both the 0.8851 support line and 0.8822 recent lows opens the immediate risk to the three-year base channel just north of 0.8700. By contrast, consensus expectations are that the RBNZ will be in a position to hike its overnight cash rate as soon as the middle of March. This has further pressurized the favored trading Australasian pair of AUD/NZD.

The IMF's Lagarde does expect global growth to strengthen this year, however, she is also concerned about seeing the significant rising risk of deflation in developed countries; the "ogre that must be fought decisively." This morning's eurozone CPI inflation print weakened as expected last month and does nothing to dispel any of the price concerns that continue to stalk the currency bloc. The Eurostat agency reaffirmed last week's preliminary headline release by reporting that consumer prices rose +0.3% from November, and were up +0.8% from the previous December print. This represents a decline in the annual rate of inflation from +0.9% in November, which happens to be and further below the rate of close to +2% that's favored by ECB's Draghi and his fellow policy makers. The "core" has fallen to +0.7%, its lowest level since 2001.

These numbers will get the fixed income juices running again as the questions to what the ECB is going to do about it will only get louder. After leaving rates unchanged earlier in the month, ECB's Draghi firmly assured the market that they would respond aggressively if inflation weakens to "dangerously" low levels, promising further "decisive action." Expect the questions to get louder as euro policy makers will be called upon on how they intend to boost economic growth. Under the guise of transparency, what tools will the ECB use if an immediate course of action is required? Or perhaps the market's inflation fears are truly irrational and that the fears of a Japanese scenario are really inappropriate. No matter, the market expects yield differentials to separate the strong from the weak. The very limited rebound in the EUR outright is encouraging speculators to more bearish action. Only a close above the 200-DMA at 1.3628 will curtail building expectations of a 1.3550 push south (last week's low). The euro bear continues to be led, not outright via the dollar, but by what's transpiring in emerging markets. The mighty dollar on the other hand remains pretty stable ahead of this morning's event risk – CPI, jobless claims and the Philly Fed survey. A plethora of Fed heads also get to speak today and that includes the outgoing Bernanke.

Forex heatmap