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Summary

  • This week will feature numerous reports from the EU and the US, and to a lesser extent the UK.
  • Will any of these reports jolt the markets from the current trading levels?
  • Confronted with a slowing economy in Germany, will the Bundesbank reduce their objections to a monetary stimulus?

The week of waiting for the numerous June economic reports is now over, and traders are longing for a pick-up in forex volatility.

The market movers are the usual: on Thursday, the ECB will announce how and to what extent they will use monetary methods to stimulate the moribund EU economy. The other major report, to be released on Friday, is the US Non-Farm Payroll report.

EURO

The economic news from the eurozone has not been robust. We have the politicians and bankers applauding the so-called recovery, and bantering about the coming additional growth. Now, years after the end of the recession, it is obvious the Teutonic austerity measures to rein in the European deficits have not worked.

EUR/USD Daily Currency Chart

(click to enlarge)

The German economy is based on investment and innovation, which enables them to export value added products; their economy differs immensely from those in the Mediterranean countries. For the Germans who depend on exports both to the EU and other countries, the single currency benefits them immensely, providing them with a large trade-free zone, and a currency more competitive than their old mark might be.

Many of the single currency members, Italy, Spain and even France, use a currency, the euro that does not work. Neither does austerity with no growth. Slowly, from the recent EU Parliament vote, euroskeptics are beginning to rebel. In France, the second largest country in the EU, Marine Le Pen's Front National Party was the big winner. It was reported:

The much greater shock is the "Séisme" in France, as Le Figaro calls it, where Marine Le Pen's Front National swept 73 electoral departments, while President Francois Hollande's socialists were reduced to two. ....

It is widely claimed that the Front is eurosceptic only on the surface. Perhaps, but when I asked Mrs Le Pen what she would do on her first day in office if she ever reached the Elysee Palace, her reply was trenchant. She would instruct the French Treasury to draft plans for the immediate restoration of the franc, that great symbol of emancipation from the English occupation (franc des Anglais).

She vowed to confront Europe's leaders with a stark choice at their first meeting: either to work with France for a "sortie concertee" or coordinated EMU break-up, or resist and let "financial Armageddon" run its course. "The euro ceases to exist the moment that France leaves, and that is our incredible strength. What are they going to do, send in tanks?" she said.

There was data released last week, which showed the EU slowdown is even reaching Germany.

The monthly number of the unemployed increased by 23.9K. It had been forecast the unemployment would decrease by 15K after last month's 25K reduction. On Monday, the German Manufacturing PMI will be released. It is anticipated the number will be 52.9 unchanged from last month.

Will any of this data cause the Bundesbank to relax control over the ECB?

ECB President Draghi has said he is ready to use his monetary powers to stimulate the economy. Certainly, the EU M3 number released last week confirmed a need for an increase in the money supply. This, the broadest measurement of the money supply, showed an increase of only 0.8%, less than the anticipated increase of 1.1% and a gain of 1% last month. Central bankers know such a small percentage of growth is a precursor to deflation.

The EURUSD has been under pressure during May. At the beginning of the month, the pair traded at 1.3990 and has since sold off to 1.3586, but finished with the old dead cat bounce to 1.3630. At the beginning of the month, specs, according to the COT report, were long 9.3K contracts. Now, they are committed to the short side, with 43.5K contracts sold. Still, with 335K contracts open this is not an exceptionally large position.

If the ECB introduces a consequential stimulant, a further sell-off to the 1.34 handle looks possible. (EURUSD, FXE, UUP, UDN) Failing that, a short covering rally to the 1.3750 level seems possible.

USD

Despite a negative report showing the first quarter GDP was a negative 1.0%, this failed to hurt the equities market as well as the USD. We will see if the strength this week was merely month-end window dressing, though this activity is generally confined to the end of a quarter.

EUR/USD Weekly Currency Chart

(click to enlarge)

The other negative for the USD was the performance of the bond market. As an example, the US 10-year treasury yield fell to 2.40% before bouncing back to 2.48% at the bell. For the month, the ten-year was down 19 basis points.

The bond market is saying the US economy is slowing, but the equities' performance says this is not true.

The Goldman take on the bull market in bonds is interesting.

But, in our view, the macro outcomes that can drive yields firmly lower from here are more consistent with significantly weaker growth out turns, whether from a renewed lurch into contraction in parts of the Euro area, a failure of US growth to maintain the current momentum, or even a further downshift in China growth(which is already tracking weaker than our forecasts) ...

If the Goldman assessment is accurate, God forbid anyone mention the R word (whisper it, 'recession').

Prior to the release of the NFP Report on Friday, there are other interesting reports.

On Monday, there is the PMI ISM report for manufacturing. Last month it was 54.9, and is expected to increase to 55.5. This will be followed on Wednesday by the PMI ISM for non-manufactured estimated to be 55.5, up from 55.2 last period. A shortfall in these reports, suggests the US economy is not responding to the monetary stimulants.

We also get the US Trade balance on Wednesday. The estimate is a negative balance of $40.6B, up from $40.4B. If there is a large departure from the anticipated trade balance, this is caused by numerous reasons. For forecasting purposes, reduced imports may indicate the US consumer is scaling back her purchases. Another monthly game-changer can be large-scale changes in the energy sector, as the US becomes an exporter of refined energy products.

The Friday NFP Report is one of the major market movers of the week. This seems based more on tradition than meaningful reality. The Dept. of Labor makes many adjustments both in the current report and preceding reports going back as far as a year or more. As a consequence, the number, which moves the market is no longer a surprise after numerous post release adjustments, and the initial market response was wrong. The problem is you cannot argue with the bottom line in your trading account.

The number of non-believers of the US data is growing. Consider some of the comments from an article, Our "Make It Look Good" Economy has failed:

The essence of the U.S. economy is make it look good: never mind quality or long-term consequences, just make it look good today, this week, this month, this quarter.....make the unemployment rate
low enough to justify re-electing the toadies currently in power...

This is, of course, an attractive lie: the future is a direct consequence of present decisions and actions. It is remarkable how quickly we latch onto the notion that an endless parade of lies, manipulations and deceptions will magically produce a warm and fuzzy future of organic growth fostered by sound investments.

Alas, an economy that relies on an endless parade of lies, manipulations and deceptions has only one possible future: failure--abject, total, undeniable, devastating.

This coming week, the anticipated NFP number is 220K net hires, compared to last month's 288K. The large number last month was in part attributable to the end of the harsh winter. The unemployment rate is forecast to increase to 6.4% from 6.3%. Traders should be very skeptical of these numbers.

GBP

Major reports in the UK are the PMIs - first, on Construction, forecast at 61.0 up from 60.8. This is followed the next day by the PMI for Services, estimated to be 58.2, down from 58.7. The service number is the more important in Britain.

Earlier last week we reviewed the British economy and its impact of the strong pound. There is a featured article in the weekend Telegraph gloating about the strong British economy. With the fastest growing economy among developed nations, they are even suggesting the bank rate will be increased to .75% two quarters earlier than previously expected.

EUR/GBP Daily Currency Chart

(click to enlarge)

Yes, there is a growing real estate bubble in London and parts of southern England, and, yes, the British pound futures market is loaded with longs as the British bears are quick to identify. The current report show specs long over 52K contracts.

Longer-term, our preference is to be long the pound versus the euro. The vibrant British economy is partially propelled by immigration of the world's wealthy. It has become a true safe-haven destination.

Should Draghi fail to provide sufficient stimulus and the euro rallied versus the pound that may give us the opportunity to sell the EURGBP (NYSEARCA:FXB). A rally to the .8170 level looks like an interesting entry.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Source: Traders Hope Reports Will Increase Volatility