Euro continues slow burn higher
From short covering to a stronger data pulse, the currency gods have smiled upon the Euro in recent times and there’s little to suggest a meaningful reversal is imminent.
Last Friday’s IFO series data were the latest in a growing list of data points indicating Europe’s largest economy, Germany may experience a recovery of sorts in 2013. Together with the unraveling of the Euro break-up trade, the reasons to expect another ‘Grexit’ style exodus from the currency are become fewer as the weeks roll by.
We could perhaps look at the Euro’s performance against the safe haven units, the Swissie and Yen, as a leading indication faith in the Euro bloc is slowly being restored. While can attribute strength against the Yen as much a Japanese story, we can’t ignore its performance against the Swiss franc, with the currency now near 4-percent higher than the lowermost limit of CHF1.20 set by the Swiss National Bank in September 2011.
Last week we also saw investors suitably encouraged by the news European banks were preparing to pay back up larger than expected portion of cheap loans provided by the European Central Bank. The loans, auctioned as part of the ECB’s Long Term Refinancing Operation, were designed to inject liquidity into the banking system. Larger than expected early repayments suggests European banks have ample capital in the current environment.
While we can’t ignore the return of confidence in the region, it’s hardly the time to breakout the bubbly given the downside risks are still well and truly present. Whichever way you look at it, the Euro remains synonymous with the term tail risk, referring to the possibility of another full-scale bout of risk aversion, particularly in light of the precarious – albeit stable – position of the periphery.
While all countries want the tag of a fundamentally sound economy, it would seem none want the currency strength that goes alongside. Once again, the phrase ‘currency wars’ has entered market vocabulary; the United States have their weak dollar policy firmly intact, Japan has declared war on the Yen and the Swiss went as far as a putting a ceiling on the franc.
If there’s one thing we can bank on, its Europe’s elite are eagerly watching the Euro appreciate and chomping at the bit to talk it lower. While recent remarks by Luxembourg Prime Minister Jean-Claude Juncker about the Euro being “dangerously high” may have been misinterpreted, it’s clear the sentiment remains, suggesting it won’t be too long before we see some veiled attempts to take some of the froth off the top. Nevertheless, for now, the fear of participating in a beggar-thy-neighbour style of policy appears to be superseding the desire to talk the Euro lower.
At the time of writing the Euro is buying $US1.3490.
Commodity units the Aussie and Kiwi led a move higher against the greenback overnight coinciding strong equity markets performance in the U.S. The Euro resumed a slow burn higher and sterling managed to regain composure after a series of down-days.
Consumer confidence in the United States fell in January, reflecting – in part – the fallout from the fiscal cliff negotiations which allowed for the expiration of Social Security tax concessions. The Conference Board said the index fell to 58.6 in January, a steep drop from December’s print of 66.7.
Still, markets found solace in data which showed the U.S housing recovery remains firmly in motion. The S&P Case-Shiller report showed house prices rose 5.52 percent in November – the fastest pace since 2006.
U.S GDP, FOMC in frame
This evening we will some insight into just how the ham-handed fiscal cliff negotiations affected U.S fourth-quarter growth. The U.S economy is expected to show growth of 1.1 percent in annual terms, significantly lower than 3.1 percent growth in third-quarter.
The FOMC also kicked off their two-day policy meeting today and investors will be watching closely this evening for any indication the Fed’s vast quantitative easing output will be stopped sooner than expected. In particular markets will be watching for any elaboration of the December meeting minutes which noted “several others thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013.”
It’s worth noting however, this statement was made in the same meeting the board decided to unleash a new round of quantitative easing, and adopt new explicit unemployment and inflation targets. A new year brings new board members who we anticipate may err on the dovish side of neutral, suggesting this statement may not reflect the views of the current line-up. Nevertheless, the risk of a US dollar reversal on this week’s FOMC decision is present with Friday’s NFP’s an equally important economic barometer, therefore a key directive for the greenback.
Aussie dollar finds its feet
The Aussie dollar recouped recent losses overnight following weakness earlier this week which briefly pulled the local unit below 104 US cents. In recent times we’ve seen the residual weakness against the Euro spill across to the benchmark AUD-USD rate, but the tide changed overnight with the Aussie moderately higher against the Euro. Yesterday NAB business confidence numbers appeared to have set the inflection while moderate strength from US equities kept the bids steady.
Nonetheless, we’ve yet to see any material gains and major themes such as this evening’s U.S GDP and FOMC policy decision will both be key greenback directives, in turn a critical part of the Aussie dollar equation. Looking further afield, Friday’s U.S jobs report also has the ability to shift the balance one way or the other and depending on what we hear from the FOMC this evening, a case could be made for U.S strength should we see a bumper number out of Friday’s non-farm payrolls.
Markets will also be watching closely the release of official Chinese manufacturing PMI and the HSBC equivalent on Friday. Both are expected to edge further above the ‘50’ level which separates expansion and contraction.
At the time of writing the Australian dollar is buying 104.65 US cents.