Euro Gaining vs. Dollar but Struggling Elsewhere amid Middling Data
Fundamental Forecast for Euro: Neutral
- Neither the German ZEW surveys nor the Euro-Zone CPI report helped the Euro.
- The EURUSD is within 1% of its yearly highs; but that’s a function of USD-weakness, not EUR-strength.
- Euro at risk amid resolution of US data backlog.
The Euro failed to capitalize on bolstered risk flows thanks to a medium-term resolution to the US fiscal deadlock, although it did manage to make significant progress towards its yearly highs ($1.3710 on February 1) against the US Dollar by the end of the week ($1.3704 on October 18). While the week’s +1.04% rally against the US Dollar isn’t surprising – we’ve previously argued that the shift in European Central Bank policy was more supportive of the Euro, making a resolution of the US fiscal crisis ultimately a positive event risk – the Euro struggled against recent FX leaders, the Australian and New Zealand Dollars.
There is a meaningful difference between the commodity currency bloc versus the Euro in recent weeks, as well as the British Pound versus the Euro: these currencies have generally improving economic data providing the fundamental footing for constructive technical trends. Euro-Zone data has been in a modest downtrend for the past two-months, with the Citi Economic Surprise Index falling from +55.80 on August 30 to a three-month low of +28.60 on October 18. The decline in the index says that Euro-Zone data has started to produce fewer upside surprises, ultimately pointing to a moderating growth trend.
Certainly, the case could be made that incoming Euro-Zone data has been mixed at best. This past week’s data exemplified this recent trend. Euro-Zone Industrial Production data for August slowed by less than forecast but the September Euro-Zone Consumer Price Index confirmed that aggregate demand in the currency bloc remained soft at best.
The German ZEW survey components suggested the same theme as well: Economic Sentiment perked up to 52.8 versus 49.6 expected unch, the highest rate since April 2010; however, Current Situation fell to 29.7 versus 31.3 expected, from 30.6, highlighting the lull in growth that developed at the end of the summer. The overall data has been middling indeed.
In the wake of the US fiscal deal this week, the Euro may continue to gain against the US Dollar; though it will be important to keep an eye on the unusual US economic calendar this week, which sees the backlogged September NFPs report released on Tuesday, October 22. As always, a major deviation from the expected print (+180K) on either side will largely dictate price action in the EURUSD. A miss will have a more amplified positive impact on the EURUSD than a beat would push the pair lower, as market participants have started to unwind the US yield curve’s pre-September FOMC price action (which amounted to US Dollar strength as the yield curve steepened) – a sign that the Federal Reserve’s expansive $85B/month QE3 program will continue at least into the 1Q’14.
With liquidity channels on both sides of the Atlantic well-saturated for the foreseeable future (via the Fed’s extended QE3 and the ECB’s OMT-in-waiting), Euro-Zone peripheral bond yields should remain low, preventing the financial aspect of the Euro-Zone flaring up and weighing on the Euro once more. As was the case last week – which failed to materialize, leading to the modest-at-best performance – the Euro will need incoming economic data to pick back up if gains beyond the low yielding currencies are to be achieved.
In the coming week, there may yet be opportunity for the Euro’s fundamental backdrop to improve and help it at least rally alongside the recently strong Australian and New Zealand Dollars. On Wednesday, the preliminary October Euro-Zone Economic Confidence index will improve to -14.5 from -14.9, holding at the highest level since August 2011. On Thursday, the preliminary October German PMI Manufacturing gauge will tick higher to 51.4 from 51.1, according to a Bloomberg News survey, and the preliminary Euro-Zone PMI Composite will inch up to 52.4 from 52.2, holding at the highest level since June 2011.
We thus maintain that, as long there are signs of a continued economic recovery – which is what the calendar shows this week – the Euro will have the opportunity to rally with the ECB remaining on the sidelines. –CV