A look at three interesting Euro crosses as the EU summit once again is unable to instill confidence. We also look at the highlights for the week ahead on the economic calendar, which is a busy one this week.
I won’t spend much time on the EU summit today after our posts and video on Friday and after our Chief economist’s Steen Jakobsen’s chronicle today, but suffice it to say that I am surprised at just how rapidly the market is losing faith once again, even as we have outlined the many reasons that this summit failed to provide any longer term solution. As Steen points out in his piece, one of the more interesting developments from last week’s process has been the degree to which Cameron has distanced himself and the UK even further from the EU core represented by Merkel/Sarkozy and the degree to which the market is nodding its approval of Mr. Cameron’s actions (and the benefit to the UK financial sector – its biggest asset – as the UK will never go forward with a the Financial Transaction Tax so many EU politicians are going on about.)
Chart: EUR/USD
The EUR/USD hardly gained much in anticipation of the summit (likely largely due to the fact that any solution was perceived to involve a much easier stance from the ECB, even if it also provided some relief on), though sovereign debt spreads improved quite dramatically. Now, EU credibility is perhaps in worse tatters than ever before and spreads are blowing back wider. The result is a EURUSD pressing at the lower end of the range and threatening to reach levels not seen since January of this year if the 1.3150 area early October low is taken out. Consider that the S&P 500 was trading well below 1100 when that low was posted while this time around, it is not more than a few percent from 4-month highs. If we ever get broad based risk off again, a charge to 1.2500 might be in the cards in the weeks ahead.
Chart: EUR/GBP
EUR/GBP is already breaking down today as the UK/Merkozy confrontation reached an impressive crescendo last week. The market is voting in favor of the UK at the moment and EURGBP today looks like it will close at a new 9-month low. Could this be setting us up for a move all the way down to last year’s multi-year low just below 0.8100?
Chart: EUR/AUD
It is rather interesting to take a contrasting reading of where the market is positioned within the G10 when we have a look over at EUR/AUD, which is actually sharply up from its lows last Thursday after having visited the 1.30 area for the fourth time this year – a persistent area of support. So even though the market is punishing the Euro, it is punishing the Aussie even more on the risk off implications of weak global markets today and weak Aussie data of late. A Shanghai composite index close overnight at new multi-year lows is helping the Aussie’s case.
Looking ahead
Today was a very interesting technical day, as the chart for EUR/AUD and AUD/USD showed us. The market attempted to pivot on Friday with bullish reversal formations for risk, and today we get disillusionment and a long candle back to the downside. This does not bode well at all for risk on a follow-through in the coming days, and we are at particularly interesting levels for the risk sensitive EUR/USD, as we indicate above. Global risk appetite will not like it if the USD continues to rally and the USD/Risk negative correlation is reflexive in nature. Stay tuned.
The enormous question of the week is – how quickly do things spin out of control this time around for the EU? On that front, keep an eye out for ad hoc stories, spreads and the like. And on the sovereign debt front, we’ve got a number of EU debt auctions this week that may serve as an indicator for whether the ECB and banks can put a lid on things for a while longer or if all roads lead straight back to EU crisis right away. Tomorrow features Spanish bill auctions of 12- and 18-month maturities and Belgian bill auctions as well. The highlights of the week are perhaps Wednesday's German 2-year auction and Thursday's Spanish auction of 4-,8- and 10-year bonds.
In the meantime, we’ve got quite a bit lined up on the economic calendar this week, below are the incomplete highlights of interest:
Tuesday
* UK CPI (perhaps key after EURGBP break today)
* Germany ZEW (has been indicating coming weakness for a long time now)
* US Retail Sales (wondering when the mean reversion starts in US data surprises after the strongest performance versus consensus in many years of late)
* US FOMC meeting (no huge developments expected considering upside data surprises and this is a one day meeting – perhaps a bit of back patting and assurance that helicopter drops ready at the least sign of weakness. This is the last meeting with the three regional hawkish presidents as voting members. Only one of the new four is a known hawk.)
Wednesday
* Norway Norges Bank rate decision (looking for the first cut since rate rises began back in 2009 – will be interesting to see how the market treats NOK from here – as pro cyclical or as safe haven)
Thursday
* Flash EU December PMI’s (for a reading on whether the deceleration is worsening in the Euro Zone economies)
* Swiss National Bank target setting meeting (they only have these four times a year – will the SNB flex its muscles once again, or is the market expecting too much as the EU situation remains too tenuous for the SNB to make a more aggressive move just yet?)
* US Empire Manufacturing and Philly Fed (first two major regional manufacturing surveys)
Friday
* US CPI (the core CPI level has headed sharply back lower over the last couple of months – will be interesting to see how the Fed responds if this heads back to zero or below in coming months, especially if other data starts to weaken.)
I won’t spend much time on the EU summit today after our posts and video on Friday and after our Chief economist’s Steen Jakobsen’s chronicle today, but suffice it to say that I am surprised at just how rapidly the market is losing faith once again, even as we have outlined the many reasons that this summit failed to provide any longer term solution. As Steen points out in his piece, one of the more interesting developments from last week’s process has been the degree to which Cameron has distanced himself and the UK even further from the EU core represented by Merkel/Sarkozy and the degree to which the market is nodding its approval of Mr. Cameron’s actions (and the benefit to the UK financial sector – its biggest asset – as the UK will never go forward with a the Financial Transaction Tax so many EU politicians are going on about.)
Chart: EUR/USD
The EUR/USD hardly gained much in anticipation of the summit (likely largely due to the fact that any solution was perceived to involve a much easier stance from the ECB, even if it also provided some relief on), though sovereign debt spreads improved quite dramatically. Now, EU credibility is perhaps in worse tatters than ever before and spreads are blowing back wider. The result is a EURUSD pressing at the lower end of the range and threatening to reach levels not seen since January of this year if the 1.3150 area early October low is taken out. Consider that the S&P 500 was trading well below 1100 when that low was posted while this time around, it is not more than a few percent from 4-month highs. If we ever get broad based risk off again, a charge to 1.2500 might be in the cards in the weeks ahead.
Chart: EUR/GBP
EUR/GBP is already breaking down today as the UK/Merkozy confrontation reached an impressive crescendo last week. The market is voting in favor of the UK at the moment and EURGBP today looks like it will close at a new 9-month low. Could this be setting us up for a move all the way down to last year’s multi-year low just below 0.8100?
Chart: EUR/AUD
It is rather interesting to take a contrasting reading of where the market is positioned within the G10 when we have a look over at EUR/AUD, which is actually sharply up from its lows last Thursday after having visited the 1.30 area for the fourth time this year – a persistent area of support. So even though the market is punishing the Euro, it is punishing the Aussie even more on the risk off implications of weak global markets today and weak Aussie data of late. A Shanghai composite index close overnight at new multi-year lows is helping the Aussie’s case.
Looking ahead
Today was a very interesting technical day, as the chart for EUR/AUD and AUD/USD showed us. The market attempted to pivot on Friday with bullish reversal formations for risk, and today we get disillusionment and a long candle back to the downside. This does not bode well at all for risk on a follow-through in the coming days, and we are at particularly interesting levels for the risk sensitive EUR/USD, as we indicate above. Global risk appetite will not like it if the USD continues to rally and the USD/Risk negative correlation is reflexive in nature. Stay tuned.
The enormous question of the week is – how quickly do things spin out of control this time around for the EU? On that front, keep an eye out for ad hoc stories, spreads and the like. And on the sovereign debt front, we’ve got a number of EU debt auctions this week that may serve as an indicator for whether the ECB and banks can put a lid on things for a while longer or if all roads lead straight back to EU crisis right away. Tomorrow features Spanish bill auctions of 12- and 18-month maturities and Belgian bill auctions as well. The highlights of the week are perhaps Wednesday's German 2-year auction and Thursday's Spanish auction of 4-,8- and 10-year bonds.
In the meantime, we’ve got quite a bit lined up on the economic calendar this week, below are the incomplete highlights of interest:
Tuesday
* UK CPI (perhaps key after EURGBP break today)
* Germany ZEW (has been indicating coming weakness for a long time now)
* US Retail Sales (wondering when the mean reversion starts in US data surprises after the strongest performance versus consensus in many years of late)
* US FOMC meeting (no huge developments expected considering upside data surprises and this is a one day meeting – perhaps a bit of back patting and assurance that helicopter drops ready at the least sign of weakness. This is the last meeting with the three regional hawkish presidents as voting members. Only one of the new four is a known hawk.)
Wednesday
* Norway Norges Bank rate decision (looking for the first cut since rate rises began back in 2009 – will be interesting to see how the market treats NOK from here – as pro cyclical or as safe haven)
Thursday
* Flash EU December PMI’s (for a reading on whether the deceleration is worsening in the Euro Zone economies)
* Swiss National Bank target setting meeting (they only have these four times a year – will the SNB flex its muscles once again, or is the market expecting too much as the EU situation remains too tenuous for the SNB to make a more aggressive move just yet?)
* US Empire Manufacturing and Philly Fed (first two major regional manufacturing surveys)
Friday
* US CPI (the core CPI level has headed sharply back lower over the last couple of months – will be interesting to see how the Fed responds if this heads back to zero or below in coming months, especially if other data starts to weaken.)