Friday’s EUR/USD squeeze has now yielded to a bit of a route as the Dutch political situation is destabilizing on disagreements over austerity and on plunging preliminary April European PMI surveys.
The Dutch government is in tatters after Geert Wilders Freedom party refused to support new austerity measures and thus will apparently force Prime Minister Mark Rutte to offer up his resignation and throw the political situation into disarray in the Netherlands. Today, Dutch fixed income spreads to Germany yawned to their widest since the financial crisis. This is particularly upsetting for the attempt to keep the awkward European Union a going concern as the country is now the second large European country (after Spain) that appears to be on the road to flouting the new “fiscal compact” rules that were agreed on so recently.
The situation for Merkel is looking more tenuous by the day on this latest news from the Netherlands as well as the victory for Hollande in the first round of the French presidential election over the weekend, which assures the expected second round run-off of Sarkozy and Hollande and a likely eventual Hollande victory. Topping off the euro-negative news was a fresh round of PMI’s today that suggest a renewed deceleration in economic growth as austerity bites hard across the continent.
EUR/USD
All of the negative data has EUR/USD on the reversal path after Friday’s positive close, though the action is fairly muted relative to the volatility in other markets like bonds and equities, but some of that lack of willingness to commit could certainly stem from nerves about the upcoming FOMC meeting. 1.3200/10 didn’t quite hold on Friday, but the Friday highs slightly above that level and the massive 1.300 support remain the key areas for the pair.
Looking Ahead
It’s all about Wednesday evening now, of course. Mr. Hilsenrath – one of the “unofficial mouthpieces” of the Fed, said in a WSJ article today that it is not likely we will get much in the way of strong hints on further QE from the Fed on Wednesday, and this may be adding to the sour mood on the day. This is much in line with my recent comments on the expectations for this Wednesdays’s meeting.
Hilsenrath says in the article that the Fed will likely slightly alter its near term inflation forecasts higher and unemployment forecasts lower and that it is too early to expect any major shift in the 2013 and 2014 forecasts. It wouldn’t be a huge surprise, however, to see Bernanke at the press conference promising strenuously that the Fed will act if necessary, even if there isn’t much new to go on in the FOMC statement itself.
It’s interesting to note NZD/USD challenging its 200-day moving average just below 0.8100 today and USD/CAD crawling back toward parity for the umpteenth time (crude oil sell-off supporting upside while the recent BoC hawkishness triggered the most recent sell-of). The reversal in JPY crosses is very fitting considering the banner day for safe haven crowding into bond markets. Watch out for the Australia CPI data for Q1 up in Asia tonight.
Stay careful out there – with the FOMC meeting this week, it appears that the risk of volatility expansion may be quite high after we recently have fiddled around at the lowest implied levels since the summer of 2008. There are too many risks in this world to believe that we are going to go back to the low volatility levels of the credit bubble days – the only way that will happen is if our governments outlaw trading entirely rather than simply brutally manipulating markets as they have been doing for the last several years.
Economic Data Highlights
- China Apr. HSBC Flash Apr. China Manufacturing PMI out at 49.1 vs. 48.3 in Mar.
- Germany Apr. Manufacturing PMI out at 46.3 vs. 49.0 expected and 48.4 in Mar.
- Germany Apr. Services PMI out at 52.6 vs. 52.3 expected and 52.1 in Mar.
- Euro Zone Apr. PMI Composite out at 47.4 vs. 49.3 expected and 49.1 in Mar.