EUR Onwards and Downwards

Risk appetite seems to have found some much needed love after yesterday’s December Federal Open Market Committee minutes indicated that Federal Reserve officials were willing to be “patient” on interest rates. Although the Fed signaled that rates are likely to climb this year, the minutes showed officials were worried about weak growth overseas, and endorsed efforts by the European Central Bank (ECB) to stimulate the eurozone economy.

This market optimism has managed to spill over to the various regions with equities opening up sharply higher amid gains in late U.S. trading yesterday. Even in Europe, Greek markets have the green light temporarily amid lower bond yields and speculated debt renegotiation talks.

For the EUR bull, the lesson seems to be to not attempt to catch a falling knife. So far this year, picking an outright bottom for the 19-member single currency has been a costly experience. Every other day early in 2015 new record lows have handily been made and to try and find a EUR buyer is proving difficult. Sometimes it looks like the Swiss National Bank is the only true buyer of the EUR. It is committed to ensuring the psychological EUR/CHF €1.2000 ceiling/floor will not be breached. The EUR/USD is now testing below the €1.18 handle after recent European Union inflation data appears to have intensified market expectations that President Mario Draghi and his fellow cohorts at the ECB would announce further policy action in the form of quantitative easing (QE) or sovereign bond buying at the bank’s January 22 meeting.

Euro Shorts Pain-Free

For the EUR, the lack of material bounce is intensifying bearish sentiment. Year-to-date, short-EUR positions have been a near pain-free experience, especially when the market broke the psychological €1.2000 handle on this week’s open. One gets the feeling that unfilled offers have been chasing the pack, forced lower and dragging with it resistance levels, while disregarding various support levels. The EUR’s significant break lower on Asia’s open this week would indicate that speculators and weaker bull positions are now rushing to sell almost any downside breaks.

Looking at International Money Market future contract positions earlier this month, the market was not significantly short the single unit. Current future EUR shorts are still -15% below last year’s peak and -30% below the 2012 record. The obvious risks from Greece exiting the eurozone, and the ECB meet, have been able to keep rebounds relatively weak. The lack of short-EUR positions would suggest that investors couldn’t afford to wait on a corrective future EUR bounce to speculatively sell. The manic selling has even portfolio managers needing to sell the EUR to adjust reserves and account for the unit’s losses. The current market pattern indicates that more sharp movement should be expected around big handle and half numbers (€1.1750, €1.1700, €1.1650).

Data Dents EUR’s Prospects

After just seven days into the new year, crude prices plummeting, closely followed by central bank rate divergence, will most likely be the top stories for this calendar year. Most of the FX price moves have been instigated by momentum rather than fundamentals. Investors and the market have not wholly factored in the knock-on effect, positive and negative, from plunging crude prices just yet, despite it beginning to seep into data headlines.

Eurozone retail sales rallied for a second consecutive month in November (+0.6%, month-over-month) an indication that falling crude prices are beginning to have a net positive influence on the vulnerable euro region. Lower energy prices allows for higher discretionary income to be spent on goods and services. The November monthly pickup was driven by a +1.4% rise in sales of goods and services rather than on perishables. Net effect, it can only support economic growth. Collectively, the two good months should be able to ease some of the deflation fears that are running rampant throughout the market after yesterday’s negative eurozone flash consumer-price index headline for December.

The main problem for policymakers is that the European consumer still remains the main supporter to very weak growth in the region. The backbone for Europe, Germany, saw manufacturing orders fall unexpectedly in November (-2.4%), an about turn to the previous month’s robust growth headline print. Other eurozone data found that manufactures became less optimistic about their prospects as 2014 came to a close. Their fears have been driven by weaker new orders and stocks beginning to pile up. Collectively, the data strengthens the case for the ECB to launch further stimulus measures. In what shape or form no one knows, but the market is betting heavily on January 22 for QE. It’s now up to Draghi to stand and deliver.

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