Euro Craters as Cross Selling Weighs

Top Stories

    * Euro hits a three week low on dollar strength and selling of EURGBP
    * Russia halts gas supplies to Balkans in dispute with Ukraine
    * Asian equity slightly higher
    * UK House Prices fall to lowest level since 1991
    * Oil at $47 off 2% as Gaza conflict goes into 11th day
    * Gold drops below $850 as dollar holds bid

Overnight Eco

    * AUD AIG Services Index 39.3 better than 37.8 last
    * JPY Monetary Base 1.8% as expected
    * GBP Nationwide HPI -2.5% vs. -1.5% as housing continues to crash
    * EUR Final Services PMI 42.1 vs. 42
    * GBP Services PMI 40.2 vs. 39 at lows but better than forecast
    * EUR CPI Flash Estimate 1.6% vs. 1.8% as inflation eases further

Event Risk on Tap

    * CAD RMPI expected at -8.3%
    * CAD IPPI expected at -0.9%
    * USD ISM Non-Manufacturing PMI expected at 36.8
    * USD Pending Home Sales expected at -0.8%
    * USD Factory Orders expected at -2.8%
    * USD FOMC Meeting Minutes

Price Action

    * USD/JPY rebounds above 9300 after profit taking early on
    * AUD/USD dragged lower by broad dollar strength towards 7000 figure
    * GBP/USD holds its ground above 1.4600 helped by EURGBP sales
    * EUR/USD pressed below 1.3400 as dollar strength persists

The euro hit a three week low against the dollar in active trade today as the unwind of the EURGBP long positions weighed on the currency throughout early European trade. In a session essentially empty of any key economic data trading was dominated by technical factors as cross selling and continued dollar strength took the EURUSD below 1.3500 figure. 

The euro has now lost more than 500 points since the start of trade this week, but majority of the decline could be attributed to massive profit taking in EURGBP cross which hit a low of 9125 in London morning session. We have long argued that the parabolic rise in EURGBP which rocketed by more than 20% over the past few months was unsustainable. While media stories speculated about the  possibility of parity in the pair we maintained that the move was grossly over done given the   lackluster fundamentals of the Eurozone. 

While in a typically speculative fashion the move in the rise in the  EURGBP exceeded even the most bullish expectations, the pair has fallen rapidly since the start of the  year under the heavy weight of profit taking. Part of the reason for pound’s recent relative strength has the been the reassessment of  UK interest rate expectations by the majority of market players. At the end of 2008, most traders expected  the BoE to cut rates by a dramatic 100bp during the  first MPC meeting of the year this Thursday. However,  the latest forecast has been tempered significantly and the consensus call now is for  only a 50bp cut creating a much more modest interest rate gap between the euro and the pound.  At the same time the view vis a vis EZ rates have shifted as well with few market participants now believing that ECB will be able to maintain rates above 2% for much longer. The net result has been a wholesale liquidation of euro longs with the EURUSD now appearing destined to test the support around the 1.3000-1.3200 level over the next few sessions. 

The unit however, may find some short term support during the North American session if US data surprises to the downside. Today’s ISM Non Manufacturing report  is expected to hit  a new low of 36.9 but if  the actual print is even worse than the forecast, the euro may rebound slightly on a relative basis. The  trade in the currency market these days is clearly a race to the bottom with neither US nor EZ economies performing well and traders laying bets on who is the least worst for the moment. 

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