1 Attachment(s)
Weekly Outlook: 2014, February 02 - 09
Euro Risks Market-wide Collapse as EURUSD, EURJPY Break Lower
Fundamental Forecast for Euro: Bearish
- Monetary policy concerns were stoked by record low inflation last week, and the ECB will deliberate on policy Thursday
- Strong capital inflows into riskier Eurozone assets have yet to be reversed, but are imminently endangered by volatility
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A mild slip by the euro this past week started to evolve into a serious tumble through Friday’s close. With the EURUSD closing below 1.3500 and EURJPY well south of 140, the world’s second most liquid currency is at risk of a more pervasive and directed selloff in the week ahead. While the technical cues were important to start the ball rolling, a dive of magnitude and persistence requires key fundamental development. As it happens, the baseline for both of the most pressing fundamental issues – financial market stability and relative monetary policy bearings – carry a bearish predilection for the euro.
The greatest risk to the Euro moving forward is the same danger that the S&P 500 and yen crosses are fixated on: concerted risk aversion. Why would we list the world’s second most liquid currency with high-yield and fundamentally unstable currencies? Excessive capital inflows. Similar to the performance of the US equity markets – but to a smaller scale – some of Europe’s riskiest assets have drawn a steady tide of foreign investment. Specifically, the sovereign bonds of the Eurozone’s periphery (Spain, Italy, Greece, etc) have attracted global investors who are seeking out higher returns.
In a speculative landscape where global yields were historically deflated, the risk of adverse market shocks have been checked by central bank stimulus and money managers have to beat impossible benchmarks like S&P 500; Eurozone government debt looked particularly attractive. After policy officials finally curbed panic of an imminent bankruptcy or departure from one of its Union’s members (the turning point seems the introduction of the ECB’s OMT program), ambitious investors found significant discounts (high yields) on the region’s debt. Investors funneled capital into the depressed assets reassured by global volatility levels at their lowest levels since 2007 and the perceived safety of ‘sovereign’ debt.
Yet, like the record highs notched by equities and leverage, there is a point of ‘oversaturation’. Yields in the periphery are now pushing multi-year lows while Spanish and Italian 2-year rates are at record lows. That is remarkable given the formers record unemployment rate (above 25 percent) and the latter’s unprecedented debt load. Further gains on these assets – along with many other Euro-area markets – are likely to be limited moving forward. If everything were to remain steady in the global financial markets, the euro would likely slowly deflate to find equilibrium. However, recent tumult suggests we are unlikely to have such a smooth adjustment.
The jump in volatility and increasingly correlated corrections across different asset classes over the past few weeks suggests sentiment is wavering and at risk of a more dramatic correction. If confidence falters, over-leveraged, fundamentally-unsound, and over-valued assets will be unwound rather quickly. The recent swell of European appetite will certainly fall victim to such a tide change.
In the absence of a concerted risk aversion drive – admittedly, I have been waiting for some time – the Euro’s outlook may still carry a bearish bias. The other fundamental theme of prominence for the FX market is relative monetary policy. At their last rate decision in November, the ECB decided to cut lending rates in response to a sudden drop in inflation. This past week, the Eurozone’s CPI reading hit a 0.7 percent record low while unemployment held at a record high 12.1 percent.
Heading into this week’s policy meeting, there is virtually no expectation of further rate cuts – whether to the benchmark or deposit rate (which has garnered significant attention as a negative rate was entertained as an option). Further easing of this type would likely be ineffective. Furthermore, it wouldn’t answer the more prominent concern. With Troika-bailed countries exiting their rescue programs (some refusing precautionary lending lines), growth still severely imbalanced, business lending contracting, short-term yields rising and liquidity shrinking; there is ample reason for the ECB to introduce a new, targeted stimulus program. In the end, whether the policy lean is aggressive or passive, it is still dovish. And, against a Fed Taper and BoE hike speculation, that is a bearish contrast.
Weekly outlook: February 3 - 7
Weekly outlook: February 3 - 7
The euro fell to 10-week lows against the dollar on Friday after data showing that the annual rate of euro zone inflation slowed in January rekindled fears that the European Central Bank would have to tighten monetary policy to avert the risk of deflation in the region.
EUR/USD hit 1.3478, the weakest since November 22 and was last down 0.49% to 1.3488. For the week, the pair lost 1.35%.
The annual rate of euro zone inflation slowed to 0.7% in January, Eurostat said, after a 0.8% gain in December. Analysts had expected the inflation rate to tick up to 0.9%.
It was the fourth consecutive month the inflation rate came in at less than 1% and was well below the ECB’s target of 2%. The ECB unexpectedly cut rates to a record low 0.25% when inflation fell to a four-year low of 0.7% in October.
The common currency fell to two-month lows against the yen, with EUR/JPY dropping 1.07% to 137.75, extending the weeks losses to 1.89%.
The dollar was also lower against the yen as euro’s steep declines and a broad based selloff in emerging economies bolstered safe haven demand. USD/JPY ended Friday’s session down 0.69% at 101.99, and finished the week 0.63% lower.
The Canadian dollar fell to a fresh four-and-a-half year lows against the U.S. dollar on Friday as the selloff in emerging markets prompted investors to stage a broad retreat from riskier assets.
USD/CAD hit highs of 1.1224 before retracting some of those gains to settle at 1.1125. NZD/USD fell 0.97% to 0.8080 at the close of trade, while AUD/USD was down 0.50% to 0.8751.
Emerging markets were hard hit by a combination of concerns over the impact of cuts to the Federal Reserve’s stimulus program and fears over a possible slowdown in China. The Turkish lira and the South African rand tumbled after surprise rate hikes did little to shore up the currencies.
Emerging market economies are vulnerable to reductions in Fed stimulus, as they rely on foreign investment to plug their current account deficits.
On Wednesday the Fed said it would scale back its monthly asset purchase program by another $10 billion to $65 billion, citing improvements in the labor market.
Data released on Thursday showed that the U.S. economy grew 3.2% in the fourth quarter, in line with expectations.
The dollar was higher against the pound and the Swiss franc on Friday. GBP/USD was down 0.29% to 1.6436 at the close and the pair lost 0.83% for the week. USD/CHF advance 0.39% to settle at 0.9064, extending the week’s gains to 1.12%.
In the week ahead, investors will be keenly anticipating Friday’s U.S. nonfarm payrolls report for January after December’s report showed that the economy added far fewer jobs than expected.
Interest rate decisions by the ECB, the Bank of England and the Reserve Bank of Australia will also be in focus.
Ahead of the coming week, Investing.com has compiled a list of these and other significant events likely to affect the markets.
Monday, February 3
Markets in China are to remain closed for the Lunar New Year holiday.
Australia is to produce data on building approvals, a leading indicator of future construction activity.
In the euro zone, Spain and Italy are to publish data on manufacturing activity. Elsewhere in Europe, Switzerland is to release its SVME manufacturing index.
The U.K. is also to publish data on manufacturing activity, a leading indicator of economic health.
Canada is to release data on raw materials price inflation.
In the U.S., the Institute of Supply Management is to produce data on manufacturing activity, a leading economic indicator.
Tuesday, February 4
The RBA is to announce its benchmark interest rate and publish its rate statement, which outlines economic conditions and the factors affecting the monetary policy decision.
Markets in China are to remain closed for the Lunar New Year holiday.
In the euro zone, Spain is to release data on the change in the number of people unemployed.
The U.K. is to publish data on construction sector activity, a leading economic indicator.
The U.S. is to produce data on factory orders, a leading indicator of production.
New Zealand is to publish data on the change in the number of people employed and the unemployment rate.
Wednesday, February 5
Markets in China are to remain closed for the Lunar New Year holiday. Japan is to publish data on average cash earnings.
The euro zone is to release data on retail sales, the government measure of consumer spending, which accounts for the majority of overall economic activity. Spain and Italy are to publish data on service sector activity.
The U.K. is also to release data on service sector activity, a leading economic indicator.
Canada is to produce data on building permits.
The U.S. is to release the ADP report on private sector job creation, which leads the government’s nonfarm payrolls report by two days. Meanwhile, the ISM is to publish a report service sector activity.
Markets in New Zealand are to remain closed for a national holiday.
Thursday, February 6
Australia is to release data on retail sales and the trade balance, the difference in value between imports and exports. The nation is also to release private sector data on business confidence.
Markets in China are to remain closed for the Lunar New Year holiday.
Germany is to publish data on factory orders.
The BoE is to announce its benchmark interest rate.
Later in the day, the ECB is to announce its benchmark interest rate. The announcement is to be followed by a press conference with President Mario Draghi.
Both the U.S. and Canada are to publish data on the trade balance, and the U.S. is also to publish the weekly report on initial jobless claims. Canada is to publish its Ivey PMI.
Friday, February 7
The RBA is to publish its monetary policy statement, which outlines economic conditions and the inflation outlook from the bank’s perspective.
Germany is to publish reports on industrial production and the trade balance.
Switzerland is to publish data on retail sales, while the Swiss National Bank is to release data on foreign currency reserves. This data is closely scrutinized for indications of the size of the bank’s operations in currency markets.
The U.K. is to produce data on manufacturing and industrial production, as well as a report on the trade balance.
Canada is to publish data on the change in the number of people employed and the unemployment rate.
The U.S. is to round up the week with the closely watched government data on nonfarm payrolls and the unemployment rate.
USD/CHF weekly outlook: February 3 - 7
USD/CHF weekly outlook: February 3 - 7
The dollar was higher against the Swiss franc on Friday as data on personal spending and consumer sentiment added to the view that the U.S. economic recovery is deepening.
USD/CHF hit highs of 0.9080, the strongest since January 23 and was last up 0.39% to 0.9062. For the week, the pair advanced 1.12%.
The pair is likely to find support at 0.8960 and resistance at 0.9133, the high of January 23.
Data released on Friday showed that U.S. consumer spending rose 0.4% in December, above expectations for an increase of 0.2%.
A separate report showed that the University of Michigan’s consumer sentiment index ticked down to 81.2 in January from 82.5 in December, but was better than the preliminary reading of 80.4 and forecasts for a reading of 81.0.
The reports came one day after data showed that the U.S. economy grew 3.2% in the fourth quarter, in line with expectations.
The data fuelled hopes that the recovery in the world’s largest economy could withstand reductions to the Federal Reserve’s asset purchase program and turmoil in emerging markets.
On Wednesday the Fed said it would scale back its monthly asset purchase program by another $10 billion to $65 billion, citing improvements in the labor market.
Emerging markets have been hard hit by a combination of concerns over the impact of cuts to the Fed’s stimulus program and fears over a possible slowdown in China. The Turkish lira and the South African rand tumbled after surprise rate hikes did little to shore up the currencies.
In the week ahead, investors will be keenly anticipating Friday’s U.S. nonfarm payrolls report for January after December’s report showed that the economy added far fewer jobs than expected.
Interest rate decisions by the European Central Bank, the Bank of England and the Reserve Bank of Australia will also be in focus.
Ahead of the coming week, Investing.com has compiled a list of these and other significant events likely to affect the markets.
Monday, February 3
Switzerland is to release its SVME manufacturing index.
In the U.S., the Institute of Supply Management is to produce data on manufacturing activity, a leading economic indicator.
Tuesday, February 4
The U.S. is to produce data on factory orders, a leading indicator of production.
Wednesday, February 5
The U.S. is to release the ADP report on private sector job creation, which leads the government’s nonfarm payrolls report by two days. Meanwhile, the ISM is to publish a report service sector activity.
Thursday, February 6
The U.S. is to publish the weekly report on initial jobless claims as well as data on the trade balance.
Friday, February 7
Switzerland is to publish data on retail sales, while the Swiss National Bank is to release data on foreign currency reserves. This data is closely scrutinized for indications of the size of the bank’s operations in currency markets.
The U.S. is to round up the week with the closely watched government data on nonfarm payrolls and the unemployment rate.