Week in FX Europe – EUR’s Timeline for Demise Lengthened

The mighty dollar aims to exit this highly charged geopolitical week on the front foot despite the many forex investors who remain on the sidelines ahead of a slew of data next week. Investors continue to search for a better sense of direction, rather than being confined to shifting the ‘goal’ posts — they want to build new ones.

Yesterday’s U.S. weekly jobless claims took an unexpectedly big dip, plunging to their lowest level in eight years, and managing to push the four-week average to a seven-year low. Data like that can only raise expectations for next week’s U.S. nonfarm payrolls (NFP) report. Nonetheless, prudent investors will probably heed to the possibility of seasonal distortions for the big slide, while others eyeing yields, will acknowledge it as just another piece of evidence that Federal Reserve tightening is needed sooner rather than later. U.S. rates are currently being priced in to start backing up in the second half of 2015.

Euro Sags before Geopolitical Strife

Rate divergence cannot come soon enough for the forex market. When it finally arrives it will help with today’s twin problems of sustainable volatility and market volume. They are the missing ingredients for firmer intraday opportunity. Currently, the forex market is handcuffed by the Group of Seven’s loose interest rate policies and a plethora of option deals. Geopolitical events have been short lived in 2014, providing minimum and short-lasting contained intraday moves. Investors can be happy about a strong U.S. earnings season; it continues to boost the bottom line balances of many portfolios as the one game in town that gives the perception of a license to print money. Nevertheless, the cry of overvaluation due to cheap money does seem to be getting louder.

The 18-member single unit, the EUR, continues to struggle. It’s currently perched, sitting atop yearly outright lows (€1.3450), still lacking the ability to move in either direction with purpose as tensions between the West and Russia continue to weigh on sentiment. The lack of a positive EUR bounce certainly heightens bearish opportunities. Many long-term investors seem comfortable with the patience trade (initiated in the first half of the year). Meanwhile, the speculators continue to set up short positions looking for a likely trigger for stops (€1.3430-40 significant).

German Business Morale Falls Again

German data is not helping the single unit’s cause this morning. Germany’s Ifo has come in softer all around, with the business climax index falling for a third consecutive month in July to 108, versus a modest dip to 109.4. It’s the same story for the current conditions index, down to 112.9 versus 114.5, while the expectations component eased to 103.4 versus 104.5. The report certainly supports the concerns about the eurozone’s growth prospects. However, this disappointing report does fall in the wake of Thursday’s strong purchasing managers’ index data from Germany and the eurozone. The astute investor should be taking solace from the latter well before the former. Today’s Ifo headline is also heavily swayed by current geopolitical tensions. Investors are concerned that Germany faces growth risks in the third quarter. The German economy has supposedly flat-lined in the second quarter. Even the International Monetary Fund (IMF) jumped onto the lower global growth expectations bandwagon this week, again cutting its forecast. The IMF said the world economy should expand by 3.4% this year, down from its April forecast of 3.7%.

The EUR continues to be pared back, and now through significant technical and psychological levels (new yearly lows below €1.3473). The much talked about €1.3400 (€1B vanilla) option barrier test seems inevitable, especially on fresh momentum. The creeping rise of short U.S. yields is supporting the USD somewhat, however, the EUR bear must first wait out some corporate or option hedging. Combined with some short-EUR cross covering heading into the weekend is making the EUR’s timeline for demise lengthen.

What to expect next week

Investors have a plethora of data to chew on next week with the highlight being the “grandaddy” of economic releases – non-farm payrolls. The Fed takes centre stage with Wednesday’s FOMC meet and no press conference. Currently Ms. Yellen and company are taking refuge behind US inflation numbers. Europe gets to take a peek at recent price activity, while China will be focusing on manufacturing PMI’s. The BoJ’s Kuroda gets to deliver some thoughts at the Research Institute of Japan on Thursday.

For NFP, the markets early thought is looking to build on June’s headline print (+288k). The Jolts (Job opening and labor turnover survey) and aggregate average for initial claims points to U.S unemployment rate falling again. Current US weekly claims are straddling the lowest levels in eight-years. Initial estimates are for a +6.1% (unchanged) next Friday, but could easily see +6.0%. A fall below +6.0% will be a huge psychological breach. Historically, the participation rate in July tends to be stable/lower if you look over last 14-yrs. A miss either way in the headline numbers should keep all asset classes very interested.

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