EUR Bull Blinded by Flash Numbers

  • Fed reinforces “normalization”
  • China flash manufacturing PMI dips to 6-month low
  • Weak Flash numbers has EUR hobbling

Federal Reserve announcements usually end up having the largest market impact, and yesterday’s release of the Federal Open Market Committee’s October meeting minutes were not to be the exception. However, the data ended up being a “non-event” as currency prices remain contained in limbo status range.

The minutes from last month’s critical meet, when Chair Janet Yellen and company formally concluded the Fed’s QE3 (third round of quantitative easing) program, reinforced market expectations for the beginning of “normalization” of policy sometime in the middle of 2015 — which came as no surprise.

Since the release, investors and dealers have witnessed U.S. Treasury yields back up a tad (10’s +2.33%), the mighty dollar found some traction, and gold prices nearly fell at yesterday’s close as U.S. policymakers remain mindful of improving both American labor conditions and economic growth. Fed members remain concerned that “measures of inflation compensation had declined somewhat” but also added “longer-term inflation expectations had remained stable.”

The market’s conclusion is that there is little in the minutes to prevent the latest projections for interest rates despite the uncertain inflation outlook. The market will want to take a closer look at this morning’s U.S. consumer-price index figures for further clarity.

China Flash Manufacturing PMI Dips
Softer data from the world’s second-largest economy continues to worry everyone. The leading assessment of China’s economy this month via the HSBC flash manufacturing purchasing managers’ index (PMI) was not particularly impressive as it missed estimates to hit a six-month low of 50.0 (on the cusp of the expansion/contraction divide). The reading is the latest evidence that the Chinese economy continues to lose traction.

Digging deeper among the most notable components:

  • Chinese employment deteriorated at a faster rate
  • Output turned to expansion from contraction
  • Export orders increased slowly
  • Input prices decline receded

On the first go-around, economists noted that Chinese “disinflationary” pressures remained strong, capacity utilization pointed to insufficient demand in the economy, and more monetary and fiscal easing measures were justified given the “significant downward pressures” on growth. Reports like this will weigh on regional commodity-sensitive currencies (NZD and AUD). China remains the Aussie’s largest trading partner, and until Australia manages to change its business mix (relying too heavily on commodities extraction/production), it will always be one of the most susceptible nations to Chinese growth shocks. The AUD has eased against the greenback on the news, trading at A$0.8607.

Weak Flash Numbers has EUR Hobbling

The 18-member single currency’s fragility is once again highlighted by this morning’s economic data. With another disappointing report, perhaps the EUR bear may want to consider holding off booking profits just yet?

The single currency squeeze to its recent lofty heights (€1.2540-70) is being reversed by poor regional PMIs. The eurozone’s November composite PMI came in at 51.4 this morning versus the 52.3 consensus and worse than last month’s 52.1 print. Data like this would suggest we should expect only +0.1-0.2% gross domestic product growth for the eurozone in the fourth quarter. The initial currency price action was rather choppy and to be expected on the back of French manufacturing and services remaining in contraction and with Germany’s reading of 50; neither expansion or contraction print.

The weak data highlights the region’s uncertain and uneven growth and it certainly helps to keep European Central Bank (ECB) easing in play. Some dealers will try to shift gears and expect to see a more proactive ECB over the coming months. Will euro policymakers be capable of sweetening December’s TLTRO (targeted longer-term refinancing operation) in a fortnight? There is a strong chance of full-blown QE in the first quarter of 2015, but ECB chief Mario Draghi needs to convince the Germans.

To date, the ECB has had the minimum of success in expanding its balance sheet. In fact, it has actually declined -€11B since the beginning of September. The EUR will remain very sensitive to short interest rate trends, with further downside very much on the cards. However, be mindful of the Swiss “floor.”

U.K. Retail Sales Rise as Prices Fall

This morning’s U.K. October retail sales (+0.8%, month-over-month, and +4.3%, year-over-year) handily beat expectations. Unfortunately, it was driven by the steepest fall in store prices as the price deflator registered its sharpest decline (-1.5%) in a dozen years. It’s not a surprise to see that the fall was led by petrol stations, backed by plummeting crude prices this year.

On the plus side, Bank of England Governor Mark Carney will be happy to see U.K. consumers, who are the main drivers behind economic growth, willing to keep spending. Many had feared that a fall in wages would have a material negative impact, obviously not yet.

Cable has risen, backing away from its 14-month lows on the strong October sales headline. It’s trying to take out the Asian overnight high, but seems to be lacking the stamina at the moment. There are market-touted offers at £1.5700 (near yesterday’s London high) and £1.5720 (post-FOMC minutes high).

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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
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Dean Popplewell