Compared to the last week, the current one seems significantly calmer concerning the economic calendar. The emotions of the breakage of important resistance levels ($1.27 and $1.30 per euro), together with the euro's appreciation against the U.S. dollar being above the EMA200 on the daily EUR/USD graph, should continue to support the euro in near term.
Several of the FOMC's members are expected to speak at different occasions during the week. Their views are important, as they could reveal further details about the recently announced QE3.
Commitment of Traders
The last report on the commitments of traders shows there is a bit of uncertainty in the big players as the extent to which non-commercial traders hold equal amounts of long and short contracts (the spread) rises to 16083 from a previous value of 3578, marking an increase of 12.5T. History shows that such a rise in the spread hardly lasts more than a week, and it could be expected that those positions were cleared during the previous week. We should see an increase in the longs in the next report, given that the non-commercial traders believe the euro will continue to appreciate.
The short positions continued their decline and marked a value of almost 137T, the lowest level since April 2012. They continue to be below the average values for both the last three months and the year-to-date. The differences are -23% and -25%, respectively.
The long positions decreased on a nominal basis, but keeping in mind the increased spread, they might grow in the next report. Currently the long positions are 4% above their average value for the last three months and 13% above their average year-to-date value.
All this shows there is an increased unwillingness from the traders to bet against the single currency.
The Week Ahead
The EUR/USD currency rate should continue to be under the influence of the last week's most important events -- the German constitutional court ruling in favor of the ESM and the fiscal compact, and the Fed's decision to launch QE3. They are expected to have a long lasting impact on the markets, as Germany's ruling cleared an important hurdle before the European leaders in their attempts to deal with the crisis, while the Fed's actions have the potential to fuel inflation expectations.
QE3 could increase the money supply significantly, thus affecting the currency rate in the long run. The $40B monthly purchases of mortgage debt would mean a new liquidity of $480B per year, which have the potential to increase the current monetary base (2.7T) by about 18% on a yearly basis. Not all of this new liquidity would translate into an increased money supply, and hence, increased inflation. It could be expected, however, that a significant portion of it will, especially if the Fed is successful in its policy and the banks start lending the new money into the economy again rather than storing it back in the Fed. All this would contribute further to USD depreciation.
Investors expecting the euro to appreciate could take advantage of their views by initiating a long position in the CurrencyShares Euro Trust (FXE). It tracks the EUR/USD currency rate and has an expense ratio of 0.40%. Those who expect the euro to lose value against the U.S. dollar could initiate a short position in the same ETF.
Another option is to open positions in the PowerShares DB USD Bull (UUP) ETF or in the PowerShares DB USD Bear ETF (UDN). Both are U.S. dollar denominated and track the value of the USD against a basket of six other major currencies. They have an expense ratio of 0.50%.
The potential for an increased money supply could have a significant impact on long term interest rates. This provides some interesting income opportunities, keeping in mind the expected steepening of the yield curve.
EMU Current Account s.a. (Jul)
EMU Trade Balance n.s.a. (Jul)
USA NY Empire State Manufacturing Index (Sep)
The market expectations about the current account and trade balance of the EU are generally positive, although the consensus value for the seasonally adjusted current account is below the previous reading. Any negative surprises on those could weight on the euro.
In the long term, if the appreciation of the euro continues, we could expect those readings to decrease further.
The market expects that the Empire State manufacturing index will show an improvement. Last week's reading of the U.S. industrial production, however, showed a surprising 1.2% decrease on a monthly basis, so a negative surprise also could not be ruled out here. In such a case, this would weigh further on the USD, and the EUR/USD could test the 1.32 area.
Update as of 3:00 pm EST, Monday
The EMU current account showed a reading of €9.7B, which is slightly below the consensus estimate. The released value of the Eurozone's trade balance for July (€15.6B) is above the previous value, but misses the estimate by about 8%. Consequently, the euro traded against the U.S. dollar around the 1.31 level for most of the European session, reaching 1.3085 for awhile.
The NY Empire State manufacturing index showed a reading of -10.41, which is well below both the expected consensus and the previous value. As expected, this caused the euro to reach the 1.317 level, surpassing for a moment Friday's highest level of 1.3169.
Currently, the EUR/USD rate is oscillating around the 1.31 zone again.
Germany ZEW Survey Economic Sentiment
EU ZEW Economic Sentiment Survey
USA Current Account (Q2)
USA Net Long TIC Flows (Jul)
USA NAHB Housing Market Index
The ZEW economic sentiment, both in Germany and on the EU level, measures institutional investors' optimism. Given the recent political and economical news from Europe, the rise expected by the market would not be a surprise. If the economic sentiment shows a far better value, this would increase the euro gains, as it would mean the investors are much more positive about the euro economy than expected.
The U.S. current account and the net long TIC flows are somewhat connected in the long run, as for the U.S. economy to continue to operate under positive expectations, a decrease in the current account would have to be coupled with an increase in the net long Treasury International Capital inflow. A recent post in the CFA Institute's blog section helps explain what the current account deficit and QE could have in common.
An increase of the net long TIC flow above the previous reading of $9.3B would show international investors have an optimistic view about U.S. credibility. Given that the yield data showed a relatively stable yields during July, a value close to or a bit below the previous one could be expected here.
A negative surprise on the NAHB index would weigh on the USD.
EU Construction Output (Jul)
USA Mortgage Applications (Sep 14)
USA Building Permits (Aug)
USA Housing Starts (Aug)
USA Existing Homes Sales Change (Aug)
A lot of construction and housing data is due out on Wednesday. Any better than the previous value (-0.5%) of the EU construction on a monthly basis would support the euro.
Since the second half of August, mortgage applications in the U.S. are experiencing an uptrend, with the last value (11.1%) being the current top. Any decrease here would suggest a slowdown of the housing market, and would weight further on the USD.
The building permits are a more important indicator than the housing starts concerning future development. The consensus is that there will be a bit of a slowdown in the permits (0.790M) compared to the previous reading of 0.812M.
The existing homes sales are also on the rise since June, so anything worse than the last reading (2.3%) would lead to a depreciation of the U.S. dollar.
Swiss Trade Balance (Aug)
Germany PPI (Aug)
Germany Markit Manufacturing PMI
EU Markit Manufacturing PMI
Spain 10-y Bonds
EU Consumer Confidence
USA Initial Jobless Claims
USA Markit Manufacturing PMI
USA Leading Indicator (Aug)
USA Philadelphia FED Manufacturing Survey
Again, Thursday is the day when the largest amount of data will be release. Starting with the Germany's PPI, the day could provide increased volatility in the EUR/USD trading. Positive surprises on the PPI data and the Markit indexes would support the euro and could lead to its appreciation.
The Spain auction should show the market's sentiment concerning the recent ECB announcements and plans. A surprising increase of the yield could significantly weight on euro prospects, although such a surprise is not very probable, given the ECB's intention to step up as a buyer in the secondary market.
The consumer confidence in Europe is marking its lowest levels since 2009, but expectations are that it will improve a bit. This could be a turning point in the confidence, so given a release better than the previous value, it should support the euro's appreciation.
On the U.S. job market, the expectations are that there will be a little improvement. This will be U.S. dollar supportive. The same is true for the Markit U.S. manufacturing PMI.
The Leading indicator is an important one, as it shows future trends in the overall economic activity in the U.S. There are expectations of a decline here. Any significantly different value than the consensus would drive the USD value in the direction of the surprise.
In line with the Empire State manufacturing index, the consensus estimate for the Philadelphia manufacturing survey is that it will show an improvement. A negative surprise here would weigh on the USD.
SNB Quarterly Bulletin
USA FED's Lockhart Speech
Friday has a significantly smaller amount of economic events. The SNB quarterly bulletin, together with the Swiss trade balance released on Thursday, could affect the market expectations about the EUR/CHF rate and the peg rate the SNB enforced last year. Those will also show if the change in the money flows towards the CHF, as a store of value changed significantly, which could hint at market expectations on the euro's direction as well.
Lockhart's speech in Atlanta on economy and policy is an interesting event, as he was among the few that raised concerns that additional monetary stimulus could increase inflation in the U.S. His views on the current U.S. economic situation could provide hints on the EUR/USD short- to near-term direction.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I am long EUR/CHF.