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EUR/USD: Euro Slumps to 10-Day Low, Athens Faces Deadline
The euro currency dived on Tuesday, falling to its ten-day low against the greenback, as traders digested unenthusiastic inflation and unemployment updates from the euro zone. Meanwhile, mixed US macro data with a surprisingly positive consumer confidence release left the cross almost unchanged.
The EUR/USD pair deteriorated 0.96% to trade at $1.0727, staying without significant volatility slightly above the intraday and ten-day low at $1.0711.
Looking ahead for the next major direction trigger, traders anticipate US non-farm payrolls on Friday as a strong indicator for the Federal Reserve as it chooses the timing of the interest rate hikes in 2015.
''While the data in the euro zone have turned up and forward-looking indicators have turned up, it's still a QE currency and for the time being even if the data are a little weaker in the US, the dollar is not a QE currency,'' head of FX strategy at BMO Capital Markets Stephen Gallo mentioned.
Consumer mood mounts
The closely-watched US consumer confidence spiked to 101.3 points in March, beating the estimate of 96.6, and advancing from 96.4 previously.
Shortly after the opening bell, the Chicago PMI came in worse than expected at 46.3 points in March, missing by far the estimate of 52.4, though still an uptick from 45.8 seen previously.
Moreover, the Richmond Federal Reserve President Jeffrey Lacker expressed his opinion in favor of a June rate hike during his speech at the Greater Richmond Chamber of Commerce.
Euro zone news
CPI from the euro zone failed to bring any positive news on Tuesday, as CPI for the entire euro zone on a yearly basis printed -0.1%, in line in expectations and confirmed the deflationary outlook for the euro zone. Moreover, the unemployment rate increased from 11.2% to 11.3%.
The euro fell under additional pressure amid doubts of the deal between Greece and its international creditors closing on time as European Council President Donald Tusk on Tuesday warned that an agreement between the parties is unlikely before the Easter holiday break. However, Greece Prime Minister Alexis Tsipras said that he was prepared for hard but honorable negotiations on Wednesday.
"It is true that we are seeking an honest compromise with our lenders but don’t expect an unconditional agreement from us," the prime minister told legislators in the Greek Parliament during an emergency session.
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Spain's Factory Activity in Buoyant Mood: March PMI
Activity in Spain's manufacturing sector continued to expand in March, signaling a solid strengthening of business conditions, the latest release from London-based Markit Economics showed on Wednesday.
Moreover, workers are increasingly feeling the benefit of growth with many companies continuing to expand their staff levels. The combination of increased new business, work in the pipeline and rising employment suggest that production growth should continue in the months ahead.
The PMI for the manufacturing sector of the euro area's fourth largest economy reached 54.3 in March, after the 54.2 recorded in February, while market analysts had predicted the index would reach 54.8.
The sector has now seen more than a year of unbroken monthly increases in production.
"The Spanish manufacturing PMI data have shown consistently solid growth for a period of time, and March continued this trend. The highlight from the latest survey was the strongest rise in employment since mid-2007, as the labor market continues to recover. Meanwhile, the sharp reductions in input prices seen in the first two months of the year were not repeated at the end of Q1 as the weakness of the euro led to rises in the cost of imported items," Andrew Harker, senior economist at Markit, said.
Spanish economy to accelerate
In its quarterly March Bulletin, the Bank of Spain raised its growth forecast for this year, predicting the nation will become one of the fastest rising economies in the euro area. The central bank predicted that the country's economy would expand 2.8% year-on-year of GDP in 2015 - an upward revision of 0.8 percentage points.
"The expansionary phase is expected to continue into 2016, at an annual average rate of 2.7%, 0.1 percentage point down on 2015, since some of the current impulses are projected to slacken somewhat," the bank said. "The risks of deviation from this baseline scenario have turned slightly to the upside, although the attendant uncertainties have not been fully dispelled."
Last year, the unemployment-ridden economy returned to growth after a six-year slump, although some underlying data gives reason for concern and points to a large amount of spare capacity in the country's economy. It expanded 1.4% in 2014 after contracting 1.2% in 2013, according to the National Statistics Office.
The services PMI release is scheduled for next Tuesday.
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EURUSD fell for the second straight day and is gazing the 1.0680 level on the last day of the quarter, as Greece list of reforms is far from ideal and once again it just drags out the negotiations, bringing us closer to the point at which Greece’s defaults on its debts, which could come as early as 9 April when a repayment of €450 million is owed to the IMF.
Germany Factories Post Highest Upturn in 11 Months: March PMI
Factories in the euro area's powerhouse remained in buoyant mood in March, with the respective PMI gauge easily beating analysts' forecasts, according to the Markit factory survey released on Wednesday.
The manufacturing PMI for the euro area's number one economy edged up to 52.8 points in March from 51.1 booked in February, the final reading showed. The gauge beat preliminary results that came in at 52.4 points.
The services PMI release is scheduled for next Tuesday. February's figure came in at 55.3.
German economy to help region out of trouble
A modest recovery is taking hold in Europe's powerhouse, building up on the optimistic GDP numbers in the fourth quarter of 2014, when Germany's economy expanded 0.7%.
The main drivers of the upbeat numbers were domestic spending that surged in the reported period and trade that also contributed a great deal to growth.
Private consumption accounted for more than half of Germany’s GDP in the fourth quarter.
Analysts point to a shift in Germany's economy, which for years has been highly dependent on exports, while they also say a lower oil price and a softer euro exchange rate should continue to lift the German economy in the months ahead.
Last month, the German Bundesbank, the country's central bank, pointed to the possibility of stronger economic growth in Germany this year compared to current forecasts, saying it could upgrade its official projections.
"Given the brighter overall economic picture, it follows that growth in Germany in the current year could be noticeably higher than the forecasts that were concluded in Autumn of last year."
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Euro Zone Factories Gain Momentum: March PMI
Activity in the manufacturing sectors across the euro zone pointed to further improving conditions in March, the final report from Markit Economics showed on Wednesday. Manufacturing activity is now gaining appreciably in addition to healthy services activity. Overall economic growth appears to be gathering momentum and looks set to gain further traction in the coming months.
The final manufacturing PMI for the euro zone rose further to 52.2 points in March, confirming a ten-month maximum reported in the flash reading. Analysts had expected a reading matching the preliminary results of 51.9 points.
Four biggest economies
In the euro area's biggest economy, Germany, final figures showed that the manufacturing sector maintained expansion in March with a reading of 52.8, its 11-month high.
Moreover, the recently released ZEW Economic Sentiment survey confirmed the positive mood swing in business sentiment in Germany, with investors' confidence improving for the fifth consecutive month, suggesting solid, if not spectacular, growth for Europe's largest economy. Likewise, the ZEW Economic Sentiment Index, evaluating the economic outlook of about 350 respondents for the six months ahead, rose to 54.8 in the third month of the year, up from the previous month when the reading stood at 53 points.
However, March’s manufacturing data from France showed an ongoing contraction in the sector, although final reading was better than weak preliminary results. The final manufacturing PMI in France came in at 48.8 in the third month of the year.
Italy's manufacturing sector improved further in March, with the respective PMI gauge edging up to 53.3, the highest level since April 2014, confirming a previous report from the sector according to which optimism remained high.
Activity in Spain's manufacturing sector continued to expand in March, signaling a solid strengthening of business conditions. The PMI for the euro area's fourth largest economy, reached 54.3 in March.
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Same news can do cause different thing (just see what did the "no change of rate" do in last couple of months for EURUSD - it was more European Central Bank comment than the "no change" - the comment was treated as a "change")
Thank you WR1 Is there any historical data which news moved the market for lets say 100 pips 160 pips or less and so on ?
Same news can do cause different thing (just see what did the "no change of rate" do in last couple of months for EUR USD - it was more ECB comment than the "no change" - the comment was treated as a "change")
Any excuse for the big dogs to make some more money - easily
macidonni
the best moves are normally No.s 1-6 and Euro / GBP interest rates
they can often be worth around 100pips
Federal Open Market Comittee is more of a 50/50 trade - some are good / some not so good
the last few around 50-60pips and normally just move in the normal daily cycles
All news is known in advance to the Market makers and big institutions, so always priced in
Handicapping Thursday's ECB Meeting
The ECB meets tomorrow. The combination of soft inflation data and Draghi's speech at Jackson Hole has raised expectations for a policy response.
Many observers have played up the risks of an asset-backed securities (ABS) purchase scheme for which Draghi said preparations are moving forward quickly. We are more skeptical that the ECB is prepared for this. There are many moving parts, and not all of them are controlled by the ECB. Moreover, the issuance of ABS varies greatly through the eurozone, though if the ECB did announce a purchase plan, we could envision banks manufacturing more.
Rather than an ABS purchase program or an outright QE, we expect more modest measures by the ECB. We think a 10 bp rate cut to bring the repo rate to 5 bp is likely. The deposit rate, which is already set at minus 10 bp could be cut further, and the top of the corridor, the 40 bp lending rate could also be shaved.
Recall that in June in response to the last rate cut, including the negative deposit rate, the euro initially sold off and then rallied to a two-week high. There was marginal follow through buying the following day, but then the euro slipped lower. Still, it did not take out the low set initially on the ECB announcement until late July.
European Central Bank officials seem focused on the Targeted Long Term Repo Operation (TLTRO) that will be launched toward the middle of this month. Some observers share our concern that for various reasons the participation may be as strong as hoped. The purpose of the TLTRO is to boost private sector lending, and demand is not particularly strong. Banks are still paying down the LTRO borrowings. The carry opportunity is not as great. There are more reporting requirements.
The ECB may announce more details of what it has called "modalities" or rules of engagement for the TLTROs. Some small banks, which do not have access to the ECB's facilities, could participate in the TLTRO through a larger bank, for example. Although the ECB has indicated this, few have focused on the implication. Since the cost of TLTRO funds 10 bp above the repo rate, a repo rate cut on the eve of the TLTRO may also help encourage stronger participation.
The purpose of the TLTRO funds are to facilitate lending to the private sector and not buying sovereign bonds (carry trade), there are not penalties for using the funds for precisely that. Our understanding is that if a bank's net lending is below the benchmark as of April 2016, the bank will simply have to repay the TLTRO funds in September 2016 instead of September 2018.
That is to say; banks will get to have two-years of low cost funding regardless of the evolution of their loan portfolio. On the assumption that banks will be reluctant to take on fresh maturity mismatches, we suspect that the prospect for a repo rate tomorrow and TLTRO borrowings has been a key factor behind the rally short-end of the euro area coupon curves. The two-year yield in Germany and the Netherlands are negative. France also flirted with negative territory in recent days.
Given the rally rally in European bonds, the carry trade is not as attractive as it may have been previously. However, the cost of the funds is still cheap and, if we are right about a repo rate cut, practically for free (5 bp annualized). This is, of course, cheaper than any other funds that banks can source. This is doubly true for smaller and weaker banks.
What about a full fledged Quantitative Easing program from the ECB? With the Outright Monetary Transactions issue still before the European Court of Justice, we do not think there is a critical mass necessary to support the effort. Moreover, given the euro's decline, about 3% against the dollar since the negative deposit rate was introduced, and a little more than trade weighted basis over the past six months, which is tantamount to some easing of monetary conditions, we suspect there is a reasonably good chance that inflation bottoms in the September-October period. This may be reflected in the new staff forecasts that will be published tomorrow (and won't be updated until December.
On the other hand, if inflation does continue to fall and deflation looms, we can envision a scenario for QE. In order to win the acceptance by Germany and other creditor members, a European-style deal would have to be arranged. Consider that Italy's President Napolitano wants to step down. He was persuaded to stay in office longer than he intended. He turns 90 in the middle of next year, and reports make it clear that he would like to retire before then.
Draghi may get German support for QE if Germany could oversee its implementation. And recall that with Lithuania joining EMU, a new voting regime at the ECB will be instituted in January 2015. Not only are the number of policy meetings reduced, but also, not all members, including Germany will vote at each meeting. This is ruffling more than a few feathers in Germany.
The proverbial circle can be squared if Draghi steps down as ECB President and takes the high profile post of Italy's president. Germany's Weidmann is the obvious choice as his successor. After Trichet, it was supposed to go to the Bundesbank's Weber, who resigned over the ECB's SMP scheme in which sovereign bonds were purchased (and turned out to be quite a profitable investment).
Some observers have stressed the poor economic performance as a reason for more aggressive ECB action. We disagree. While we recognize the weakness of the region's economy, we do not think European central banks generally see monetary policy as the instrument to address it. At Jackson Hole, Draghi called for fiscal flexibility. This apparently, according to some press accounts, raised the ire of senior German officials. The German concern is not only over the well-worn moral hazard arguments, it is about debt in the first place and the rejection of Keynesian demand management. We have suggested it is very revealing that in German, the word for debt and guilt is the same.
Structural reforms and the promotion of risk-taking and profit-seeking behavior over the traditional rent-seeking is necessary. This does not necessarily mean embracing neo-liberalism. Germany instituted key reforms several years after the Berlin Wall fell, for example. Spain appears to be engaging in a similar effort now.
In fairness, the EU has shown willingness to explore the fiscal flexibility that is embedded in the Stability and Growth Pact. Has not France, Italy, Spain and others been given more time to reach the 3% deficit target? Perhaps Draghi's comments were not so much about the debtor countries, but the surplus countries, like Germany. With the German economy slowing, is there really a compelling reason for it to strive for a budget surplus?
We also take exception with arguments that contend that the problem in Europe is the lack of private investment. We think the problem is one of aggregate demand. The large trade surplus shows that the EMU is producing more goods than it consumes. Moreover, capacity is under-utilized. I cannot think of a major country that has had an economic recovery that was led by investment for at least several decades. Public investment in a different story. Here it does not appear that all of the funds, including EU funds, that are for infra-structure spending have been used. European countries are their own worse enemies in this context.
European officials pride themselves on the rule-based approaches, but the rules are respected often only in the breach. One area of public investment that euro area countries consistently miss is their pledge to spend 2% of GDP on defense. Greece is one of the only EMU members that does, and it is probably among the least able to do so (though it buys its weapons primarily from Germany and France, which participate in lending it funds). In light of the events in Ukraine, and on the eve of the NATO meeting, an increase in defense spending may turn out to be a more viable path. To be sure, this is not to advocate military Keynesianism, just merely to recognize that it is an area that may be explored on political, economic and ideological grounds.
The euro has fallen for seven consecutive weeks coming into this week. The gross speculative short euro position in the futures market is within a stone's throw of the record set just before Draghi uttered his famous pledge in July 2012. While we expected the interest rate and growth trajectory to sustain the downtrend in the euro, we are concerned about the risks of either disappointment with the ECB or "sell the rumor, buy the fact" type of activity. Medium term investors should be prepared for the a counter-trend move, which should seen as a better opportunity to get with the trend by reducing euro exposure directly or through hedges
source
Thanks for the news.
EUR/USD: Euro Flies Over $1.08 Mark
The euro added firm gains ahead of the European open, as the greenback was pressured by weaker-than-expected US economic data, raising a question mark above payrolls expectations for Friday.
European single currency added 0.54% to hit fresh intraday highs of $1.0817. However, the euro slumped more than 11% over the first three months of 2015, which gave a boost to European equities, notably to German ones. Besides a weak euro, equities are further supported by lower oil prices, the start of QE and there now appears to be growing evidence that the economic outlook is also starting to improve as well, despite some weak spots in the form of Greece and France.
Focus in Europe remains on Greece, and the ongoing negotiations between Greek government officials and EU officials with respect to the status of the latest version of the Greek reform list. A new list was submitted yesterday, but initial soundings suggest that it remains as short on detail as the list that was put forward at the end of last week.
"Yesterday's disappointing ADP non-farm payrolls and ISM manufacturing PMI readings may have gotten a little too much attention as it was greeted by a strong bid tone in treasuries, while the greenback was a touch weaker. However in the past six months or so we’ve seen the private payrolls reading understate the official payrolls reading, which will be released on Friday. As a result, any sizeable gains in Friday’s release could really reignite the greenback.," Stan Shamu from IG wrote on Thursday.
The ADP employment report unveiled worse-than-expected results as only 189,000 jobs were created in March, compared to an estimate of 225,000, a drop from slightly revised 214,000 a month before. The figures, however, are just a precursor to Friday's highly awaited non-farm payrolls report.
The non-farm payroll figures are expected to show 245,000 jobs added to the economy, which is below the 12-month average of 275,000.
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