How Low Can The EUR Go?

  • Swiss the ‘only’ lovers of the EUR
  • More rhetoric from Draghi and company
  • Aussie negotiates a new record low
  • CBR rumored to be trigger happy

Who cares? Just as long as you are not ‘long’ any it seems — except perhaps against the CHF. The Swiss National Bank (SNB) appears to be the only entity wholly committed to fulfill its requirements to keep the “line in the sand,” or the EUR/CHF floor (€1.2000) very much intact, insisting it will buy as many EURs as it takes to get the job done. For everyone else the popular move seems to be to sell EURs and see you down there.

This Wednesday marks the beginning of the last three days of market event risk before the annual holiday “funny” price season really begins despite the two-day Federal Open Market Committee meet that begins on December 16. The 18-member single unit managed to slip to a new two-year low (€1.2326) during this morning’s European session, with expectations of further easing running ahead of tomorrow’s highly anticipated European Central Bank (ECB) meet.

The EUR has been driven lower by confirmation from today’s swath of purchasing managers’ index (PMI) services data that the eurozone economy remains fragile, while disinflation builds. The November composite PMI fell to 51.1, from the flash 51.4, down a full point from October’s announcement. Digging deeper, the new orders component has contracted for the first time in 18 months, while prices point to inflation risks remaining to the downside. None of this is new to eurozone policymakers — they have talked enough about it of late, but will they react?

More Rhetoric from Draghi and Company

The data further supports the case for quantitative easing (QE). Persistently low inflation and a flagging economic recovery have certainly upped the pressure on the ECB to expand its program of asset purchases. This course of action would have an obvious negative impact on the EUR, nevertheless, the market is pricing in QE being delivered in the first quarter of 2015 and not tomorrow. Many expect Draghi and company to further lay the “foundation” for QE. In other words, make sure that politicians and the general public truly understand what it means and its justification. The danger is that so many are betting against the EUR, that if the ECB does not deliver or throw a dovish bone, the single currency could rise once again and ruin many individuals’ holiday festivities.

Central Bank of Russia under Further Pressure

Central banks are certainly dominating this week’s activity. The regular announcements are being priced as routine (even today’s Bank of Canada statement). Nevertheless, some bankers will be called upon to react to varying market conditions and none more so than the Central Bank of Russia (CBR). While direct currency intervention or support was seen as unlikely until recently (the dismissal of bands to direct intervention), the move of the currency above USD/RUB $54 seems to have pushed the CBR to act this morning. The RUB price action is looking rather ugly this morning, falling shy of $55 and rising from $53 within a breath; it’s price action not for the fainthearted. It seems that the market will follow crude oil prices to support its convictions. Supposedly, if Brent could stabilize at around $70/bbl., then the USD/RUB has a chance to retreat towards the low $50 range.

Volatile crude prices are not complicating things just for the CBR. Oil price moves are making gold investors very frustrated. The precious metal experts usually follow the price of oil as it has an impact on consumer costs and inflation. The current whiplash price activity from the black stuff is managing to incite some of the biggest price swings for bullion in nearly a year. Adding to investors’ pain is a dollar rally that’s curbing demand for alternative assets.

In November, gold fell to a four-year low as the market saw less need for a store-of-value, while this week the metal rallied the most in 14 months ($1,203) when crude managed to rebound from its five-year low. Its a natural toss for the metals direction under current conditions. Nevertheless, there are supposed to be many negative factors capable of pushing gold down and only a few of support — it’s a waiting game of patience.

Later this morning North America takes delivery of a potential red herring: ADP’s employment data. Initial forecasts are looking for a +221k print. Remember last month: it beat expectations (+230k versus +220k), while the nonfarm payrolls went on to miss its forecast two days later (+214k versus +230k).

Aussie Slides to a New Record Low

In the overnight session, the AUD managed to fall to a new four-year low (A$0.8390) on the back of a disappointing third-quarter gross domestic product report. This is allowing for the market to begin pricing in more Reserve Bank of Australia (RBA) cuts. The report missed consensus on a quarter-over-quarter (+0.3% versus +0.7%) and year-over-year basis. Digging deeper, capital investment was a huge drag on growth, falling -2.7% after a +0.3% rise previously. Not surprisingly, construction was also a key detractor to Aussie growth (-0.2%, quarter-over-quarter). However, the slowdown in growth is still in line with RBA expectations, and the market needs to remain wary of not getting too far ahead of the RBA rate curve. Down Under, the yield still looks attractive to many portfolio managers.

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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