By Dean Popplewell
The EUR gains in the latter half of last month have been mostly about positioning, with a market caught record short the "single unit" heading into a five-week stretch of significant policy responses. Helicopter Ben’s dovish message from Jackson Hole last week, has to a certain extent, left the “mighty” dollar more vulnerable. As we head into September, while exposed to event risk, investors will be looking for more concrete news from Europe otherwise the EUR remains under pressure, particularly more so, if ECB easing is part of the policy prescription tomorrow.
Already the markets seem to have shaken off the EUR positive news reported only just yesterday. Until this morning, the EUR sentiment continued to benefit from comments from Draghi. He mentioned on Monday that the ECB could operate in the 3-year and closer sector of the bond markets without serious risk of monetary financing. However, weak eurozone data has undermined this sentiment ahead of the ECB policy meeting where Draghi and company are expected to provide some clarity on how they will tackle the euro debt crisis. The market expects, at the very least, policymakers to outline a framework for a bond-buying program. The danger of disappointment could very well overrun the EUR as expectations of ECB action run very high.
Data releases this morning are not giving investors too much to cheer about. eurozone business activity slid at an accelerated pace last month, the latest indicator that the region is most likely to enter a recession and further proof that the German economy is on the back foot. The euro composite PMI fell to 46.3 from 46.5 in July. The preliminary reading came in at 46.6. The final print confirms a steep month-to-month contraction in activity across both manufacturing and the services industries. It also confirms that the eurozone will likely contract in Q3 and is on course to fall back into a technical recession. The more significant reading was out of Germany where the composite print fell to a three year low of 47 from 47.5. The decline was modest compared with its neighbors, but ongoing weakness will raise concerns about it remaining at the “head of the euro-table.”
Euro Retail Sales fell in July as rising unemployment and falling confidence likely weighed on demand. Volume of sales fell -0.2% and slid -1.7% on the year. The headline prints were very much in line with expectations. Most notable was sales falling in Germany (-0.9%), providing stronger proof that Europe’s largest economy is beginning to feel the effects of the debt crisis and economic slowdown that most of its neighbors have been enduring for some time.
The 10-year +EUR5b Bund issue this morning was soft. Technically the auction went uncovered (1.09 vs. three auction average 1.19), receiving only +EUR3.93b total bids for sale and a final allotment of +EUR3.61b. The average yield was +1.42%.
Governor Carney from the Bank of Canada makes his presence felt later this morning with his Bank’s interest rate announcement. The market expects the BoC to remain on hold and to maintain its current hawkish tone. Why would they do so in a CBank dovish environment? Canada’s Q2 GDP of +1.8% was in line with the BoC’s forecast, but with its core inflation still running below the Bank’s +1.9%, y/y, projection for Q3. Now that inflation is a non issue, there is no need for a change in policy outlook just yet. On the other hand they will not tighten, particularly with the loonie trading above parity and the Fed poised to ease again. With the futures dealers still pricing a +25% probability of a hike by year-end leaves the currency exposed to downside data surprises.
Technically for the EUR, the intermediate term downward trend line continues to cap it after yesterday’s reversal lower. The repeated failures at the 30-day upper bolli-band of around 1.2635 is shifting the bias back to the downside. Medium term, the market seems focused on the 30-DMA around 1.2403, however, the downside continuation needs to first chew through 1.2488/65 and then 1.2436 before eying any prize. The market remains a better seller on upticks.