BUNDs and PMI to hurt EUR?

What are we waiting for? Despite yesterday being the beginning of the New Year for the rest of the world, it seems that the markets are underwhelmed by the rise in the US ISM. Thus far, it has failed to sustain a broad global equity rally or a significant FX move. Yesterday’s FOMC minutes did not seem to have a major affect on the markets either way. The key new news was that the Fed will now publish Fed funds forecasts on a quarterly basis when it provides other economic projections (next round due after the January 24 meeting). Officials would provide forecasts for the first hike, although with current guidance still suggesting rates will remain near zero until the middle of 2013 that is not exactly earth shattering.

Technical analysts are telling us that the EUR is about to straddle their next pivotal point. A daily close above the 21 DMA at 1.3080 suggests a return to 1.32-1.3240 before the currency becomes a sell again. Now that this markets seems significantly long dollars over the holiday period, the potential for this ‘little blip’ is possible, again squeezing out the weak short EUR positions. The dollar is clearly a risk-averse currency, even falling against the Yen, in the general risk recovery seen so far in 2012. All this is occurring against a backdrop of solid US data and the market perception that the US is likely to outperform Europe this year. It seems all eyes are on this Friday’s NFP release (+153k and +8.7%-early estimates). Before the release any continuation of risk-positive sentiment should remain dollar negative.

Euro data this am shows that the Private sector activity in the region shrank again last month, another indication that the area is heading back into recession. Despite the composite PMI for manufacturing and services rising to 48.3 in December from 47 in November, the sub-50 print still implies that the 17-Euro member currency contracted lat month for a fourth consecutive time, including all the fourth-quarter. The slight uplift has done little for the currency or euro negative thinking this session. Analysts note that the last quarter fall in output was the sharpest in two-years. Do not bet against a first quarter decline, two consecutive quarters would confirm a European recession.

Big picture, all of this is only going to complicate efforts for the Euro-zone leaders. The “perception” of trying to put finances in order and regain investor confidence, a condition for ending the debt crisis, could yet threaten Italy and Spain (capital markets next target in the ‘cross-hairs’). Both of these countries continue to report big drops in output. Even Germany’s return to growth in the final quarter will do little to dispel any of the 2011 accumulated negativity by investors for the region. It seems that the market does not like a two-speed Euro-zone (stronger Germany and France versus almost the rest), the weighting is too heavy. Perhaps until Friday, the market will continue to try to cap the EUR despite the long dollar weighting. With a German January 2022 Bund bid-to-cover ratio of 1.3 for EUR+5.14b makes that a tad easier!

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The Eurozone PR Battle continues

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell