What Excuse Is The EUR To Use Now?

by: Dean Popplewell

It is shaping up to be a less than enthusiastic Monday morning open. The G10 pairs remain somewhat steady at levels close to Friday’s close, apart from sterling. In contrast, it looks like a few emerging currencies misbehaved during their session (TWD, KRW), deciding to dance a weakening "jig" against the “mighty” dollar. Analysts have suggested that both these specific moves occurred to portfolio month-end rebalancing requirements.

Do not be surprised to see this excuse being used for some anomaly G10 pricing before this week is out. The Asian market should now be focusing on tomorrow's Reserve Bank of India policy decision where consensus expects a -25bps cut.

The pound continues to suffer from last week’s fallout, this after a disappointing U.K. Q4 GDP flash estimates beating the worst of expectations. The data is definitely showing the signs of a “triple-dip recession.” The lack of fiscal room maneuvering implies the "Old Lady," soon to be under the tutelage of a new Canadian Governor, warrants more aggressive monetary policy moves.

This will be a total different landscape for Governor Carney. Canada has been punching well above her weight for sometime, and many observers will expect the new governor to provide the same. The lack of fiscal and monetary wriggle room should lead to further GBP weakness in the medium term.

Stateside, it’s a busy week for data with ISM, Q4 GDP, and the granddaddy for all facts, NFP slated for release. Do not be surprised to see data announcements coming in a touch "lighter." This would very much reinforce the more recent downward trend in the “US data surprise index.” If this prophesy holds true, then any crowded gains in the most risk-sensitive of neighborly currencies (MXN), should be handily dumped.

The loonie, on its own mission of late, could respond and be demoted to the bears lofty targets suggested at the end of last week, around 1.0250. Any pullback in U.S. front-end rates would also prove supportive for USDJPY and for EURUSD.

It seems unanimous this week; the market expects a slowdown in US Q4 GDP (3.1%, q/q, to +1.0%). Obviously, one of the first excuses to be plied will be the temporary outlier of Hurricane Sandy. It’s an analyst vocation to explain away variables understating an economy’s true underlying trend growth and Sandy is one of them.

Initial bets for Friday’s NFP is a middle of the road +155k print, coupled with an unchanged unemployment rate at +7.8%. There is nothing to suggest changing the averages just yet, but by weeks end, one does not know. The same can be said for the ISM manufacturing release a few hours later on Friday (easing from 50.7 to 50.0 this month). Early in the week, do not be surprised to see U.S. consumer confidence retreating. Even the FOMC announcement mid-week is not expected to be bringing “any policy innovations to the table.”

If we were focusing just on the EUR, then the market should be expecting the trend of firmer data in Europe to continue this week, both in the core and in the periphery. This can only mean better things for the single unit.

The EU week’s highlight will be focusing on the final PMI manufacturing data on Friday, and specifically on the peripheral breakdown. The market is now beginning to change its colors, and expects to see firmer readings across the board. The markets' new norm and focus will be the ECB announcing the LTRO repayment schedule also on Friday’s. A strong repayment schedule will be many individuals bullish signal.

Falling euro periphery yields and last Friday’s LTRO schedule repayment results are giving the "single currency" some new found momentum that wants to push it towards the new psychological point of 1.37. Investors are now asking “and why not?”

With the euro fiscal situation becoming more improved, along with the ECB pro-actively reducing their balance sheet while the Fed is adding to theirs is a huge plus for the EUR. An improved fiscal situation will eventually translate into a much-improved economic one.

So far on any EUR pullbacks there seems to be a broader demand for the unit on various crosses, especially EUR/Asia (JPY) and EUR/Commodity (CAD especially) currencies for now. The market should expect option-pricing movements to come more in play. Today, large expires at 1.3400 and 1.3490 are recorded.

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