By Dean Popplewell
Monetary policy paralysis has this market battered and bruised after this weeks FX moves. Draghi’s initial fighting words yesterday had the market classically stopping out a plethora of weaker EUR short outright positions ahead of 1.24, only to come crashing down when the market realized again that policy makers ideology was getting ahead of reality. Investors had high hopes that policy makers would deliver a comprehensive solution at the ECB monetary meeting this week. Draghi managed to announce a number of measures which “could” benefit European debt markets. However, with too many questions remaining regarding specific details and implementation of these plans disappointed the market. Policy makers again have “under-delivered versus expectations” and why many are licking their wounds keeping their powder dry ahead of NFP this morning.
U.S. payrolls will be a tough release to play out in a few hours. Analysts note that reaction to today’s employment report and services ISM will be “complicated by the contingent message sent by the Fed in this week’s policy statement.” Response from both the FED and ECB has somewhat muddied the water for a stronger print to support a broad risk recovery. A better than expected print should benefit risk-sensitive currencies at “the margin” and support the dollar outright against the EUR and JPY. Obviously with a weaker headline all risk bets will mostly be taken off. Market consensus is for a +110k print, anything close would be regarded as neutral and after how policy makers have reacted this week, a strong appetite for risk is just not there. This should allow risk sensitive currencies to come under pressure again.
So far this morning, the Euro market has tentatively retraced some of yesterday’s losses after the final reading for the euro services PMI came in at 47.9, slightly ahead of the initial estimate of 47.6. The Spanish reading was the one of particular interest. It gained a tad to 43.7 from 43.4 in June, ahead of expectations for a fall to 42.9. Despite the print being better, Spanish domestic demand is still expected to suffer in the coming quarters.
Certainly not as bright was growth in the dominant U.K. service sector which slowed to its weakest rate in 19-months last month. The headline reading of the services PMI dropped to 51 from 51.3 in June and it strongly suggests that the British economy may struggle to recover from a recession in Q3. This is just compounding the pressure on the wisdom of the British governments austerity drive and its ability to cut its budget deficit. Finally, the volume of retail sales in the EZ rose for the second straight month in June (+0.1%). Certainly nothing much to get excited about as this is unlikely to continue in the face of rising unemployment and weakening of regional consumer confidence.
Where has the IMF been? A worse case simulation by themselves found that EZ output could be cut by-5% if policy makers did not act and the eurozone crisis worsened. “The sense is that not enough is being done to stop the spread of stresses and attenuate fiscal-growth-banking feed back loops” it said of the EZ policy actions so far. The debt crisis is clearly engulfing the entire currency bloc and it smaller neighbors, it said!
The retail market is small long heading into payrolls. Some of these EUR positions are clearly offside from yesterday’s price action, while some are newly acquired when bottom feeding in an oversold market. The overall bias remains on the downside, now that 1.24 was protected, for a retest of 1.2042 (this years low). The technicals tell you that both the 10 and 30-day moving averages are negatively aligned, reinforcing the market offer position. Do not be surprised if the market quietly steps away and closes up shop early if there are no surprises.