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#Post#: 213--------------------------------------------------
EUR – Beware of the ECB
By: Kathy Lien Date: November 16, 2014, 7:10 am
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EUR – Beware of the ECB
USD – What to Expect for NFPs
GBP – Carney to Leave Policy Steady at First BoE Meeting
AUD Hits New Lows, Eyeing 90 Cents
USD/CAD Retreats from 1 Year High
NZD – Service Sector Activity in China Slows
JPY – Labor Cash Earnings Unchanged
EUR – Beware of the ECB
On the eve of the European Central Bank’s monetary policy
meeting, the euro is trading well. Having dropped to a low of
1.2923 on an intraday basis, the currency staged a strong
recovery against the dollar, ending the North American session
around 1.30. The magnetism of this key level has been nothing
short of impressive especially considering the political
troubles in the Eurozone and mixed economic data. The bounce in
the euro can be attributed to the pullback in Portuguese 10 year
bond yields, which hit a high of 7.977% before settling down at
7.33%, up 68bp for the day. While the European Central Bank is
widely expected to leave interest rates unchanged, they won’t be
happy to see the recent volatility in the European equity,
currency and bond markets.
Since the last ECB meeting, we have seen more improvements than
deterioration in the Eurozone economy. In Germany specifically,
consumer spending has been healthy, unemployment rolls have
declined, leading to an improvement in business and investor
confidence. However the strength was not without areas of
weakness. Businesses and investors grew more optimistic about
future economic activity but more grim about current activity.
Considering that the current performance of the economy is what
really matters, the ECB may look beyond everyone’s hope for
improvement. Also stronger service sector activity in the
region’s largest economy was offset by a deeper contraction in
manufacturing. So as you can see the recovery in the Eurozone is
uneven and when combined with a 5% sell-off in the DAX, since
the last meeting the ECB has very little to be optimistic about.
Furthermore, a political crisis has hit Portugal, putting the
region at risk of greater uncertainty and turmoil. The crisis
was kicked off by the resignation of the leader of the junior
party. If a grand coalition cannot be formed, the government may
be forced to hold early elections, which would be negative for
the euro because it would mean the collapse of the current
government. This political uncertainty combined with mixed
Eurozone data and the recent volatility in the financial markets
leads us to believe that ECB President Draghi will retain an
open mind on non-standard monetary policy measures including
negative deposit rates and remind investors that they are in a
very different position from the Federal Reserve and as such
will keep rates low for as long as necessary. In a nutshell, we
don’t think Draghi will have anything kind to say for the euro
and if his level of dovishness increases, it could drive the
currency pair to 1.29. In the off chance that he surprises with
optimism, 1.30 could become a bottom for EUR/USD.
USD – What to Expect for NFPs
The U.S. dollar traded lower against all of the major currencies
today with the exception of the Australian dollar. With the
release of mostly better than expected U.S. economic reports,
the sell-off in the greenback suggests that some traders are
squaring dollar long positions ahead of the July 4th holiday.
U.S. markets are closed tomorrow but the ECB meeting could still
trigger volatility in the early part of the session. Trading
will most likely grind to a halt however after the European
close. Since we won’t be publishing an end of day piece
tomorrow, we want to take this opportunity to discuss the
payrolls report. Based on the leading indicators for NFPs, we
expect the pace of growth to be maintained. The increase in the
employment component of non-manufacturing ISM, ADP report and
the low level of jobless claims supports a stronger release but
consumer confidence has been mixed and layoffs increased
according to Challenger Grey & Christmas. What the market is
really focusing on is the unemployment rate. Economists expect
the jobless rate to fall from 7.6% to 7.5%. Given the Federal
Reserve’s decision to lower their forecasts for the unemployment
rate, the market is looking for a similar improvement. If the
number comes out as expected, the dollar could extend its gains
but if the unemployment rate holds steady, long dollar positions
could be unwound as investors question the Fed’s prudence on
tapering asset purchases this year. Meanwhile today’s U.S.
economic reports were mostly better than expected but the
general anti-risk sentiment in the financial markets caused
USD/JPY to reverse its gains and more specifically drove the
Japanese Yen higher against all of the major currencies. The
dollar received only a minor lift from better than expected
labor market numbers. Jobless claims dropped to 343K in the week
of June 29th from 348K. According to private payrolls provider
ADP, U.S. companies added 188K workers last month, up from 134K.
Service sector activity slowed in the month of June with the ISM
non-manufacturing index dropping to 52.2 from 53.7. Despite this
decline, the outlook for the labor market and Friday’s NFP
report is still bright because job growth increased in the
service sector last month. The employment component of the ISM
non-manufacturing index rose to its highest level since
February, which still points to a strong NFP release.
GBP – Carney to Leave Policy Steady at First BoE Meeting
The British Pound strengthened against the major currencies
today thanks to the service sector, which grew at its strongest
pace in more than two years in June. Economists had been looking
for service sector activity to slow but instead of doing so, it
accelerated quickly. The index by Markit Economics and the
Chartered Institute of Purchasing and Supply rose to 56.9 from
54.9. Markit said, “The buoyant picture for June means the
economy is on course to expand by at least 0.5% in the second
quarter, with more growth to come.” A report by the British
Retail Consortium revealed that shop price inflation declined in
June at its fastest pace in more than six years. BRC said, “The
deflation is driven entirely by non-food, a reflection that the
summer sales are well underway as retailers battle it out to
shift stock and compete for customer spending. The volatile
weather also had a part to play in pushing down non-food
prices.” Earlier data this week showed construction and
manufacturing sector expanding and this trifecta of growth will
leave the Bank of England firmly on hold tomorrow. It will be
the first monetary policy meeting for BoE Governor Mark Carney
who took office on July 1st.
AUD Hits New Lows, Eyeing 90 Cents
The Australian dollar fell to fresh lows against the US dollar
while the Canadian and New Zealand dollars rebounded.
Considering that Australian economic data was mixed, the
sell-off in the AUD was driven entirely by the dovish comments
from Reserve Bank of Australia Governor Glenn Stevens who
reiterated his view that the country was now transitioning from
a commodity boom and the Aussie would need to be lower in order
for Australian businesses to compete. According to our colleague
Boris Schlossberg, interest rate futures spiked on his words
with markets now pricing in a 60% chance of a rate cut at the
next RBA meeting in August. When the RBA met a day prior Stevens
said, “We have to negotiate the downward phase of the investment
boom over the next few years, which appears likely to pose
significant changes.” He said that “confidence seems pretty
subdued right now.” “Much depends on confidence – that
intangible thing that is hard to measure and very hard to
increase.” Stevens was optimistic about China, who is
Australia’s largest trading partner even though we have seen
nothing but downward surprises. Overnight, China’s
non-manufacturing PMI index dropped to 53.9 from 54.3. Meanwhile
Australia’s trade balance rose to $670M AUD in May exceeding
forecasts for a $53M AUD surplus. The Australian Bureau of
Statistics revealed that retail sales were rose to 0.1% in May,
when economists had anticipated a 0.3% rise. Service sector
activity accelerated to 41.5 in June, up from 40.6 in May.
JPY – Labor Cash Earnings Unchanged
The Japanese Yen strengthened against all of the major
currencies today with the exception of the British pound. A
report by the Labor Ministry revealed that Japan’s labor cash
earnings stayed unchanged for a second consecutive month. The
Bank of Japan said the economy is “picking up” in its current
assessment report. In its next policy meeting next week, the
bank may divulge more on what they mean. The bank raised the
assessment for seven consecutive months which may be beneficial
to Prime Minister Shinzo. Gaining popularity by maintaining
economic growth will help Abe in an upper house election coming
this month. Abe wants to gather support for the package of
monetary and fiscal stimulus and business deregulation through
Abenomics.
__________________
Kathy Lien
Managing Director
BK Asset Management
www.bkassetmanagement.com
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