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FOREX: Euro Under Fire as EU Leaders Begin Critical Summit

FOREX: Euro Under Fire as EU Leaders Begin Critical Summit

2011-03-24 07:31:00
Ilya Spivak, Sr. Currency Strategist
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Overnight Headlines

  • New Zealand Dollar Outperforms as Q4 GDP Result Tops Forecasts
  • Japan’s Trade Balance Back in Surplus as Export Growth Accelerates
  • Euro Consolidates as Currency Markets Brace for EU Leaders’ Summit

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.4025

1.4169

GBPUSD

1.6173

1.6340

The Euro and the British Pound were little changed in overnight trade, with the single currency trapped in a range 1.41 to the US Dollar while sterling oscillated sideways in a narrow band below 1.6270 to the greenback. We remain short NZDUSD.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

21:45

NZD

Gross Domestic Product (QoQ) (4Q)

0.2%

0.1%

-0.2%

21:45

NZD

Gross Domestic Product (YoY) (4Q)

0.8%

0.7%

1.5%

23:00

AUD

Conference Board Leading Index (JAN)

0.1%

-

0.7%

23:50

JPY

Merchandise Trade Balance Total (¥) (FEB)

654.1B

897.3B

-471.4B

23:50

JPY

Adjusted Merchandise Trade Balance (¥) (FEB)

556.0B

676.8B

268.8B (R+)

23:50

JPY

Merchandise Trade Exports (YoY) (FEB)

9.0%

9.1%

1.4%

23:50

JPY

Merchandise Trade Imports (YoY) (FEB)

9.9%

4.4%

12.4%

00:30

AUD

RBA’s Bi-Annual Financial Stability Review

-

-

-

02:30

CNY

HSBC Flash China Manufacturing PMI (MAR)

52.5

-

51.7

The New Zealand Dollar outperformed in overnight trade after fourth-quarter Gross Domestic Product figures topped economists’ forecasts and calmed worries about the onset of recession. Output added 0.2 percent in the three months through December, beating expectations calling for a 0.1 percent increase. Traders went into the release concerned about the prospect of a technical recession (defined as two consecutive quarters of negative growth) after GDP unexpectedly shrank in the third quarter and finance minister Bill English said the same could occur again in the following period. The Kiwi rose as much as 0.9 percent on average against the major currencies.

Japan’s Merchandise Trade Balanceswung back into surplus in February, albeit a smaller one than economists expected, as export growth accelerated. Overseas sales grew at an annual pace of 9 percent having added just 1.4 percent in the previous month. The outlook going forward is far from rosy however as the Tohoku earthquake is reflected in international trade flows. Specifically, exports are likely to suffer with much of Japan’s industrial capacity still offline in the aftermath of the disaster while imports will surely soar, boosted by reconstruction-driven demand as well as the need to substitute foreign-produced energy (oil, coal) while the nuclear power sector is mired in the Fukushima Daiichi fiasco.

Euro Session: What to Expect

GMT

CCY

EVENT

EXP

PREV

IMPACT

-

EUR

EU Leaders’ Summit Begins in Brussels

-

-

High

07:45

EUR

French Business Confidence Indicator (MAR)

105

106

Low

07:45

EUR

French Own-Company Production Outlook (MAR)

-

16

Low

07:45

EUR

French Production Outlook Indicator (MAR)

-

19

Low

08:00

EUR

French PMI Manufacturing (MAR P)

56.0

55.7

Low

08:00

EUR

French PMI Services (MAR P)

59.5

59.7

Low

08:30

EUR

German PMI Manufacturing (MAR A)

62.0

62.7

Medium

08:30

EUR

German PMI Services (MAR A)

58.4

58.6

Medium

09:00

EUR

Euro-Zone PMI Composite (MAR A)

57.8

58.2

Medium

09:00

EUR

Euro-Zone PMI Manufacturing (MAR A)

58.3

59

Medium

09:00

EUR

Euro-Zone PMI Services (MAR A)

56.3

56.8

Medium

09:00

EUR

Italian Consumer Confidence Index sa (MAR)

106.0

106.4

Low

09:30

GBP

Retail Sales ex Auto Fuel (MoM) (FEB)

-0.6%

1.6%

Medium

09:30

GBP

Retail Sales ex Auto Fuel (YoY) (FEB)

2.5%

5.3%

Medium

09:30

GBP

Retail Sales w/Auto Fuel (MoM) (FEB)

-0.6%

1.9%

Low

09:30

GBP

Retail Sales w/Auto Fuel (YoY) (FEB)

2.4%

5.3%

Low

All eyes have turned to Brussels where the leaders of the European Union are set to begin a much-anticipated summit that has been promised to produce a “grand bargain” that comprehensively resolves the sovereign risk problems that have plagued the region over the past two years. Traders got an underwhelming preview of things to come two weeks ago and little progress appears to have been made since, with Luxembourg Prime Minister Jean-Claude Juncker saying today that he expected a final agreement to be pushed back to June. Juncker’s assessment is particularly damning considering he doubles as the head of the Eurogroup – a consortium of Euro Zone finance ministers.

As we have discussed previously, the outline of the final deal that has emerged is woefully inadequate. Most elementally, although the existing European Financial Stability Facility (EFSF) is to be allowed access to its full capital base of €440 billion, that seems hardly enough to bail out the larger of the debt-strapped member states. This is clearly problematic considering overnight reports from Spanish newspaper Expansion saying Moody’s was preparing to issue “massive” cuts to the credit ratings of the country’s banks, an action that is sure to stoke risk premiums and push up borrowing costs, thereby accelerating the march toward a funding crisis. Spain is the fourth-largest economy in the Euro Zone and is due to refinance €7.3 billion in maturing debt within the coming month. The funds had been borrowed at an average yield of 0.89 percent. Comparable yields now stand at 1.95 percent and would surely rise following a downgrade and in the event that the EU fails to produce something acceptable to the markets at this week’s sit-down.

An overnight failure to secure the passage of austerity measures in Portugal and the subsequent resignation of Prime Minister Jose Socrates further complicates matters. The country is also set to finance a large tranche of maturing debt (€4.3 billion) by April 15and will have to do so at a substantial premium after yields hit record highs in the aftermath of austerity’s failure. This pushes Portugal ever-closer to seeking an EFSF life-line, but the absence of a coherent government coupled with lingering uncertainty about the future of the bailout fund itself make negotiating a rescue a decidedly difficult endeavor, especially given the tight time frames that policymakers have to work within.

On balance, the current landscape appears overtly negative for the Euro as traders unleash a wave of disappointed selling, overlooking mounting ECB rate hike expectations. Indeed, although the markets are pricing in a 100 percent probability of at least a 25bps rate increase in April, it is important to bear in mind that the ECB was raising rates all the way into the single currency's major top at record highs above 1.60 in July 2008, so monetary tightening in and of itself may not keep the it afloat unless the sovereign debt fiasco is meaningfully resolved.

On the data front, the preliminary set of March’s Euro Zone Purchasing Manager Index is expected to show that manufacturing- and service-sector growth cooled from the previous month, reinforcing already substantial downward pressure on the Euro. Meanwhile, UK Retail Sales growth is expected to slow in February, with receipts adding just 2.5 percent from the previous year. An analogous report from the British Retail Consortium released earlier this month suggests that a downside surprise is possible however, showing sales fell 0.4 percent over the period in question.

For real time news and analysis, please visit http://www.dailyfx.com/real_time_news

To receive future articles by email, please contact Ilya at ispivak@dailyfx.com

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