EUR Demise Supported By Record-Low Peripheral Yields

This Friday cannot come soon enough for some forex market participants. So far this week, investors have been starved for fundamental data to back their currency positions. Many have had to make do with last week’s central bank rhetoric for direction. The currency positioning play has been agonizingly slow to watch and the current market grind requires more fundamentals to confirm investors’ opinions. By the end of this week, there is sure to be some month-end portfolio rebalancing shenanigans that will put some of the weaker currency positions under pressure. In recent months, it has been predominately a net-buying dollar event by U.S. corporations.

Excluding tomorrow’s German inflation data, there is a plethora of Japanese economic numbers to be released on Friday, and they are likely to influence expectations on whether Bank of Japan (BoJ) Governor Haruhiko Kuroda will “top up” the country’s stimulus program. Japanese data is predicted to show that the world’s third-largest economy is once again floundering after hiking the sales consumption tax in April (from +5% to +8%). The market will be focusing on the Japanese core consumer-price index (excluding food and energy). It’s forecast to rise +3.3% on the year in July — or +1.3% excluding the impact of the tax increase. These numbers are well below the BoJ’s +2% inflation target. Last weekend’s rallying cry by Kuroda indicated that Japanese authorities “remain committed to its accommodative stance until the +2% inflation target is met and maintained in a sustainable manner.” Will the BoJ try and inflate progress with more “hot-air” or will it add to its aggressive easing program?

European Consumer Confidence Wanes

European reports again missed expectations, as the region continues to report deterioration in economic data. This morning’s session saw misses in German import prices (-0.4%), and a slight miss in the monthly GfK consumer sentiment survey (8.6 versus 8.9). Even Italian and French consumers’ waning confidence managed to slow European bourses’ two-day equity rally. It’s all about the investor weighing weak European data with the timing of a possible European Central Bank (ECB) introduction of a quantitative easing (QE) program.

Confidence among French manufacturers fell slightly this month (96 versus 100) as they become less optimistic about the future. Of note, this morning’s report was conducted before President François Hollande dissolved his government. Nevertheless, there is little global confidence in Europe’s second-largest economy as it pursues an austerity-measured approach to fixing what ails.

Italy is faring no better as consumer confidence fell for a third consecutive month, sinking to its lowest level since April (101.9 versus 104.4 — no World Cup performance correlation). It’s not a surprise to see that the drop was led by a deterioration in general sentiment and “lower expectations to the economic situation.” Already this month, Italy, Europe’s third-largest economy, has slipped back into a technical recession. Both of these surveys indicated that there are ongoing concerns over falling prices — currently and for the future — highlighting the ECB’s dreaded “deflation trap.” Little wonder the market is betting that the ECB is edging closer to QE.

Euro Periphery Bonds in Demand

Despite geopolitical threats (Russia and Ukraine talks fail to produce a breakthrough); the risk of implementing QE is supporting eurozone bond prices. German 10-year Bunds (+0.93%) are again trading close to record-low yields. Even overseas buying is lifting peripheral debt, with yields in France, Italy, Spain and Portugal all sinking to fresh record lows this morning.

As noted throughout the week, long-dated Bonos (Portugal debt paper) are faring best, where 30-year spreads are about -6bps tighter to Bunds, while 10-year product lags just behind at -5bps. Italian bonds will continue to lag ahead of tomorrow’s supply. Before a bond auction, it’s the trader’s intent to try to back-up the benchmark interest rate curve to allow some room to take down supply at a more favorable rate (higher yields equals lower prices).

German Minister Disagrees with Draghi’s Fiscal View

The trend remains the market’s friend. The EUR’s new trend lower is keeping the long-term bearish outlook intact. Any market fear will be about the currency being oversold. The EUR popped earlier this morning, threatening to take out the psychological €1.3200 handle with conviction, after Germany’s Finance Minister Wolfgang Schaebule said that ECB President Mario Draghi had been “over-interpreted” when he suggested that fiscal policy could play a greater role in promoting growth. The single unit’s gains have been aggressively capped, somewhat indicating the strength of the bearish nature of the currency. The EUR currently resides just ahead of its yearly lows, and somewhat handcuffed to a plethora of option barriers and month-end requests.

In the short term, the selling of EUR on the crosses will determine the currency’s direction. Month-end speculation supposedly rests with USD sellers, and it’s worth noting that today is spot-value month-end — historically of late, this has attracted a decent U.S. bid for dollars. Some price moves will not be explained from here to week’s end. Expect month-end demand to be held accountable.

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This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

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