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FOREX: Euro Vulnerable Ahead of ECB Interest Rate Decision

FOREX: Euro Vulnerable Ahead of ECB Interest Rate Decision

2011-02-03 07:00:00
Ilya Spivak, Sr. Currency Strategist
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Overnight Headlines

  • NZ Dollar Sold as Unemployment Soars, Cutting RBNZ Outlook
  • Euro Consolidates Near 1.38 Ahead of ECB Interest Rate Decision

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.3756

1.3843

GBPUSD

1.6138

1.6229

The Euro was little changed in overnight trade, oscillating in a narrow band around the 1.38 level to the US Dollar. Trading in the British Pound was likewise muted, with prices tracking sideways near the 1.62 figure.

Asia Session: What Happened

CCY

GMT

EVENT

ACT

EXP

PREV

NZD

21:45

Unemployment Rate (4Q)

6.8%

6.5%

6.4%

NZD

21:45

Participation Rate (QoQ) (4Q)

67.9%

68.2%

68.3%

NZD

21:45

Employment Change (QoQ) (4Q)

-0.5%

0.2%

1.1% (R+)

NZD

21:45

Employment Change (YoY) (4Q)

1.3%

2.0%

1.8%

AUD

22:30

AiG Performance of Service Index (JAN)

45.5

-

46.4

AUD

0:30

Building Approvals (MoM) (DEC)

8.7%

1.3%

-3.9% (R+)

AUD

0:30

Building Approvals (YoY) (DEC)

-5.0%

-13.7%

-9.1% (R+)

AUD

0:30

Trade Balance (Australian dollar) (DEC)

1981M

1600M

2078M (R+)

CNY

1:00

China Non-Manufacturing PMI (JAN)

56.4

-

56.5

The New Zealand Dollar underperformed in otherwise quiet Asian trade as the Unemployment Rate unexpectedly soared to 6.8 percent in the fourth quarter, weighing heavily on RBNZ rate hike expectations. The economy shed 11,000 jobs from the previous quarter. A Credit Suisse gauge of priced-in rate hike expectations for the year ahead dropped 9 basis points, marking the largest drawdown in seven weeks. The currency shed as much as 0.95 percent on average against its major counterparts in the aftermath of the report.

Euro Session: What to Expect

CCY

GMT

EVENT

EXP

PREV

IMPACT

CHF

7:15

Trade Balance (Swiss franc) (DEC)

-

1.79B

Medium

CHF

7:15

Exports (MoM) (DEC)

-

-3.4%

Low

CHF

7:15

Imports (MoM) (DEC)

-

-3.3%

Low

EUR

8:45

Italian PMI Services (JAN)

50.5

50.2

Low

EUR

8:50

French PMI Services (JAN F)

57.1

57.1

Low

EUR

8:55

German PMI Services (JAN F)

60

60

Medium

EUR

9:00

Euro-Zone PMI Composite (JAN F)

56.3

56.3

Medium

EUR

9:00

Euro-Zone PMI Services (JAN F)

55.2

55.2

Medium

GBP

9:30

Purchasing Manager Index Services (JAN)

51.3

49.7

Medium

GBP

9:30

Official Reserves (Changes) (JAN)

-

$976M

Low

EUR

10:00

Euro-Zone Retail Sales (MoM) (DEC)

0.5%

-0.3%

Medium

EUR

10:00

Euro-Zone Retail Sales (YoY) (DEC)

0.2%

0.8%

Medium

EUR

12:45

European Central Bank Rate Decision

1.0%

1.0%

High

An interest rate decision from the European Central Bank headlines the economic calendar, with policymakers expected to keep the benchmark lending rate at 1 percent. The spotlight will thus fall on the statement accompanying the announcement, with traders on the lookout for hawkish overtones after headline inflation soared to 2.4 percent earlier this week. A meaningful shift in rhetoric seems unlikely however considering this sit-down comes just three weeks after the previous policy meeting, with ECB President Jean-Claude Trichet likely to reiterate that while current rates remain appropriate, inflation risks may shift to the upside. Such sentiments represented a substantial shift when they emerged in January, but markets have since had ample opportunity to price them into the exchange rate and have arguably done so, with the single currency up 6.3 percent since then.

However, the markets’ realignment of expectations toward a more hawkish ECB has pushed borrowing costs higher along with the single currency, with Euribor (the three-month lending rate) as well as benchmark 2-year yields at the highest since August 2009. This may prove problematic as close to $10 billion in Spanish and Italian debt reach maturity within the next 30 days alone, with a far busier bond expiry calendar on tap for the remainder of March and April. Refinancing said redemptions at current rates ought to prove costly; for example $7.9 billion in a Spanish 1-year bond originally borrowed at 0.86 percent would now require paying a rate of 2.15 percent. This hints that renewed sovereign stress is a distinct possibility over the coming weeks as periphery member states struggle to meet their obligations, suggesting that Trichet may have scope to backtrack on some of his recent commentary to help ease funding stress at least until Euro Zone finance ministers meet on March 25 to finalize the region’s bailout mechanism.

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