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Will EUR/USD Break 1.3000 or 1.2750 on Heavy Data, Risk Trends?

By , Chief Currency Strategist
25 May 2013 03:50 GMT

Will_EURUSD_Break_13000_or_12750_on_Heavy_Data_Risk_Trends_body_EUR.jpg, Will EUR/USD Break 1.3000 or 1.2750 on Heavy Data, Risk Trends?

Will EUR/USD Break 1.3000 or 1.2750 on Heavy Data, Risk Trends?

Fundamental Forecast for Euro: Bullish

The euro didn’t put in for a concerted move of its own this past week – happy to simply ride the current on stronger counterparts like the US dollar. However, the week ahead will likely see the Euro-region fundamentals generate a lot of the trading activity for the period. Running through the docket of scheduled event risk, there is a heavy round of releases that will speak to the region’s painful economic performance as well as the conveniently overlooked financial rumblings in key areas. And, of course, we should never overlook the overriding influence that investor sentiment itself can have over a currency that is dependent on a dubious calm.

There are two pillars of fundamental interest when it comes to the health of the Eurozone and its economy: the infectious recession and the constant risk of a financial crisis flare up. After years of shattered nerves under these twin realities, investors have grown tolerant of these conditions when the threat of an immediate collapse isn’t at hand. In other words, if there isn’t a crisis flare up; traders are willing to brave the questionable investment environment in order to chase assets whose prices are depressed and yield leveraged higher due to previous swells of panic.

For growth, there are a few important pieces of event risk that can stir the euro, sovereign debt and capital flow through the region. Just a few weeks ago, first quarter GDP figures showed us that the enduring recession in the periphery was dragging down the core with weaker German growth and a deeper French contraction. Hope still seems high though – further bolstered by the PMI figures (monthly substitutes for the bigger growth figures) which improved modestly this past week. Though, it should be said that even those improvements kept the Eurozone in contractionary territory.

At the top of the list, we should watch for the OECD semi-annual economic forecasts. These will offer a broader look at the region and set the tone for international investors. If there is an assessment that is lower than the regional governments’ own forecasts or even the IMF, it could unsettle many flighty investors. As encompassing as this multi-national body’s assessment is, though, its market-moving potential in an extreme case scenario pales in comparison to the Slovenian 1Q GDP figures due on Friday. As the country considered most likely to be the next chapter in the Eurozone’s financial crisis saga, a poor outcome can virtually ensure yet another country has to seek a rescue. And, now that ‘bail-ins’ are the preferred method; it would be another opportunity to test investors’ already-thin patience.

Growth is a constant dilemma, but financial stability ebbs and flows with greater influence over the currency and rates market. It isn’t difficult to predict who and what will be a serious threat in the future, but it is difficult to establish ‘when’. Spain for example, is living on borrowed time and funds with a banking sector that will have to set aside another €10 billion for future loan losses on a €200 billion in recently rolled debt. The year-to-date budget report from the country will be a notable report, but the recent rise in the nation’s 10-year sovereign bond yield likely represents the more tangible threat. Meanwhile, Portugal has essentially been ignored because there have been countries in far worse shape. That being said, we should not overlook the potential in a poor showing from the Bank of Portugal’s Financial Stability Report (due 14:00 GMT on Tuesday). We can also look to the front end of the crisis curve as Slovenia, Cyprus and Greece are smaller – but far more explosive – threats to the system. Yet, the most headline-worthy event on the docket is the annual policy assessment and recommendations from the EU on Wednesday.

It is preferable to see the spark to a strong market move ahead of time, but such catalysts are often obscure and unknown ahead of time. A serious problem in Slovenia or even Germany can be ‘played down’ if there is a high level of tolerance for risk in the broader market – where fear of a crisis spread is low and the chase for yields high. Therefore, euro traders should also closely monitor the sentiment level in the broader market. If fear were to gain traction as the capital markets were threatening this past week, a regional recession and high probability of another financial eruption would quickly place the euro on the chopping block…

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25 May 2013 03:50 GMT