Whats Up With The Euro ?

European-based investors had the first opportunity to react on the weak US payrolls, released on Friday. The euro eked out minimal gains in non-European markets on both Friday and Monday. However, a very minor attempt to rise at the European open was rapidly overwhelmed by the overall aversion to risk. European equities opened weak and while they stabilized quite rapidly, it was clear that concerns about Spain and Italy dominated investors’ minds. The 4-day break hadn’t taken away worries that Spain is losing its battle to rectify its public finances according to the time-path agreed by EU. The government over the weekend tried to dampen fears by announcing another €10B in spending cuts mainly in health care and education (without giving much details). However, many see an all too familiar (vicious) spiral starting: more austerity leads to deeper GDP falls, needing more austerity to reach the targets that remain out of reach. It shouldn’t necessarily go this way, but chances for such a development are quite high and thus need to be translated in selling of Spanish bonds and equities. The case of Italy is less clear-cut but it suffers by association. There are also ever more indications that Spain needs more capital for its banks and despite all official denials about the need for a banking bail-out, Spain seems inching towards such an operation. 

EUR/USD fell to 1.3060 around European noon when a short squeeze pushed the pair towards 1.3140. During the move, US NIFB small business sentiment was reported much weaker than expected. It is no market mover and a one month drop shouldn’t be too disconcerting, but it feels a bit uncomfortable. OECD leading indicators however brought relief as they suggest the economy is recovering, but it had not much impact. However, the short-squeeze was short-lived and euro selling drove the pair to a 1.3053 intra-day low, partly driven by a sell-off in US equities. There was no dash though to push the pair for a test of first support area at 1.3030, allowing the pair to close at 1.3082.

Overnight and today, Asian stocks show some resilience, helped by upbeat Alcoa results and comments. US equity futures are modestly in positive territory.

This suggests European equities may find their composure too, but we should warn that one shouldn’t too rapidly buy into a corrective selling wave. There might be more correction to come. The Beige Book is interesting, but mostly mirrors what the recent eco data have told us. However, following the weak payrolls report, market may seize any suggestion in the book that would downgrade the situation in the labor market. News about Italy or Spain, nothing is firmly scheduled, is potentially market moving, but so are Fed officials. Yesterday, the hawks Fisher and Kocherlakota expressed again their concerns about the ultra-loose Fed policy (see bond section), but their views are well known and thus ignored. Today, some more governors will speak, amongst them the influential (dovish) vice-chair Yellen. Markets will closely look whether she would again bring QE-3 on the table, a dollar negative factor (please note that her speech is scheduled after US market closure). Given the (few) items on the agenda and the past few days’ price action, we think that it may again be a range-trading session. If risk aversion would become the theme, the key support area of 1.3030 to 1.2974 may come under test, but is probably too tough to break in a first attempt. On the upside there is potentially, from technical point of view, more space with first key resistance at 1.3347/68


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