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Key EURUSD Drivers Thursday, Friday, & Ramifications For All Markets

 Thursday’s Main Events and Ramifications

The USD general slide halted today vs. most other major currencies on a combination of EU and US events, as is so often the case.

Here’s what happened today and what is likely to determine the direction of the EURUSD, and likely the rest of the forex and commodity markets, for the rest of the week.

Short Term Sentiment Shifts In Favor Of The USD

 

The Euro got some really bad news, and the USD got some promising news, shifting short term value perceptions.

ECB Rate Hikes, Si Vous Plait? Not Today, Said Trichet

The key event for the forex markets today (possibly the week) was ECB Head Trichet’s unexpectedly dovish remarks. Good data from the core EZ economies and clear inflationary pressures in Europe had convinced many traders that the ‘hard money’ oriented ECB would start raising interest rates sooner than the Fed. In the simplest terms, that would mean increased demand for the EUR vs. the USD. They were sorely disappointed.

No real surprise. As we’ve repeated many times, the ECB’s cannot raise rates and risk pushing the weaker economies over the abyss until these are stabilized and markets are truly reassured that the sovereign debt and banking crisis has passed.

No such calm is likely despite ECB attempts to prop up PIIGS bond sales.  Why?

There are many reasons, here’s a review of the most compelling.

Due to domestic political opposition to more bailout contributions, Germany continues to resist expanding the EU bailout fund unless recipient nations submit to even harsher supervision and conditions, including a loss of control over their own finances that means a de facto loss of sovereignty. Merkel & Co. know they won’t get a complete fiscal surrender from the PIIGS. Germany’s goal is to allow another crisis on a threat of a wave of PIIGS defaults and ensuing market collapse. That allows German leaders to say they had no choice but to pay up or risk calamity in Germany too.

Ireland’s elections may yield a pro-restructure default government. Raising rates and making Ireland and the EZ less competitive with a stronger Euro will increase that risk that Ireland ( or Greece) decides that it cannot afford to honor its obligations and must seek restructure. Once one nation takes this route, at least some of the other PIIGS will be forced to follow as scared credit markets send PIIGS yields beyond what these nations can afford.

US Non-Manufacturing PMI Solidly Beats Forecasts

Short term currency movements are all about changes in short term expectations about one currency vs. the other. Trichet’s surprise was sufficient by itself to make the US Dollar look relatively better than it did before, and thus send the EURUSD down. The great US services PMI reading added fuel to the USD rally, because the non-manufacturing sector provides over 80% of the jobs in the US. Jobs and consumer spending are THE metrics that determine the pace of Fed rate increases.

Bernanke Upbeat Vs. Trichet

In contrast to Trichet, the tone of Fed Head Bernanke’s comments today was overall optimistic.

In sum, the USD’s prospects brightened vs. the EUR. Because the EURUSD makes up about a third of all forex trade, when this pair is falling, the USD gets a boost vs. all other currencies and the EUR is similarly pressured lower.

Thus not surprisingly, most major currencies were down vs. the USD with the exception of the AUD, which was soaring on it better than expected balance of trade and building permits data. Taken with the RBA’s hawkish remarks recently, the AUD is having a great week

By the way, as with the ECB, the Fed can’t raise rates any time soon either without similarly risking the US recovery. For more on that here’s a great article (probably the best I’ve seen this week) by Chris Martenson,  How Long Can The Party In Stocks Really Last?

Friday’s Monthly US Jobs Key Friday Event

 

Assuming no surprises from the Middle East, Friday’s monthly US jobs reports has the most potential to either fuel or douse the USD rally.  The preliminary indications are mixed. ADP disappointed, but manufacturing and non- manufacturing PMIs have been great. Hiring is not great, but firings are low. The consensus is that the US added about 130K jobs in January vs. about 100K in December.  We don’t expect a major bullish reaction unless the result is well above estimates. After all, at a rate or 130k new jobs/month it could take a decade to get the 8-16 million jobless and underemployed back to working and spending.

The US recovery may be in process but jobs are not yet feeling the love.

 

The other key scheduled risk event is the Reserve Bank of Australia’s policy statement. The RBA has been sounding hawkish, and more of that tone could give markets a boost, as Australia is a key barometer of critical Chinese growth.

Ramifications

 

Keep in mind that while Fed QE 2, unsterilized ECB cash,  and other government money continues to flow into markets, the bias is for the ongoing multi-month uptrend to continue.

For risk assets like stocks, industrial and agricultural commodities, and currencies that rise with risk assets (the AUD, NZD, CAD, EUR and GBP in order of correlation to stocks and other risk assets), that means continued drift higher. It means the opposite for safe haven assets that move opposite risk assets like the JPY, USD, CHF and AAA bonds in those currencies.

To influence that trend, tomorrow’s job reports need to be either:

Exceptionally good (~ +200K or better): Most risk assets up, possibly the USD too if markets decide rate increases are looking closer.  Likelihood of this is low.

Exceptionally bad (~ -80K or worse): Most risk assets drop, USD might actually rise on its safe haven appeal (interest rate increase expectations are already very low), AAA bonds, JPY and CHF rise too. The EUR has little of its own event risk Friday, so it will likely continue to move in the opposite direction of the USD.

DISCLOSURE & DISCLAIMER: AUTHOR SHORT THE EUR FOR PERSONAL PORTFOLIO. THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY AND NOT TO BE CONSTRUED AS SPECIFIC TRADING ADVICE. RESPONSIBILITY FOR TRADE DECISIONS IS SOLELY WITH THE READER