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Top 3 Risks for EUR Next Week

Last updated 11/4/2011 4:34 PM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• EUR: TOP 3 RISKS NEXT WEEK
• USD: G20 WAS A DUD, NFP NOT BAD
• GBP: NO ACTION EXPECTED FROM BOE NEXT WEEK
• CAD: MAJOR JOB LOSSES MEANS BOC NEEDS TO EASE
• AUD: EMPLOYMENT NUMBERS ON TAP IN COMING WEEK
• NZD: GOLD AND OIL PRICES VIRTUALLY UNCHANGED
• JPY: FOR THE TIME BEING, INTERVENTION WORKED

EXPECTATIONS FOR UPCOMING FED MEETINGS

EUR: TOP 3 RISKS NEXT WEEK

It has been a very busy big week for the euro and unfortunately few of the region’s problems have been resolved. For this reason we could see additional volatility in the currency this week as continuing developments help investors get their hands around the risks in the Eurozone. Hopefully by the end of this evening, we will know whether Greek Prime Minister Papandreou wins or loses the no confidence vote. This is the biggest risk that the euro faces next week because the vote could mark a turning point in the Eurozone’s debt crisis. If Papandreou loses the vote, a coalition or transitional government will have to be installed and elections may need to be called. Even if he survives the vote, he is under pressure within his own party to resign. Immediately after the no confidence vote, investors will be looking to see if Papandreou resigns. Then they will be looking to see what type of new government is formed and if elections are necessary, how quickly they will occur. The big risk is that Greece will not be able to receive its next aid payment in time to avoid a default.  The new government will then have to announce their support for the EU debt deal if they want to remove uncertainty and restore credibility. Most likely, any new government will quickly approve the October 26 deal in the hopes that the EU and IMF will release the sixth tranche of aid. The impact of the no confidence vote on the euro will largely depend on how quickly the Greek government mobilizes on a response this weekend. If come Sunday, we know whether Papandreou remains in office and what type of new government will be formed along with their support for the EU debt deal, the vote could be positive for the euro. If a number of unanswered questions remain, then the euro could be in for more trouble. 

The second major risk for the euro next week is Italy. Despite a major internal rebellion, Prime Minister Berlusconi refused to step down, prompting his Finance Minister to warn that “there will be a disaster on the markets if you, Silvio, stay at your post and do not go. Because the problem for Europe and the markets, correct or not as it may be, is in fact you.” Tremonti and Berlusconi have never had a good relationship but these latest comments imply more trouble ahead for the Eurozone. As part of the G20 developments, Italy has agreed to allow the IMF and a team from the European Commission to monitor their austerity efforts. The Italian-German bond yield spread continues to widening which is alarming for European officials because it is nearing levels that have forced Greece, Portugal and Ireland to ask for aid. Italian 10 year bond yields are at 6.35 percent which compares to a yield of only 1.82 percent in Germany and 7.82 percent in Ireland. Greek yields are much higher at 24 percent.

The third risk is the Eurogroup and ECOFIN meetings where the details of the EU Summit deal are expected to be ironed out. With European leaders questioning Greece’s membership in the Eurozone, headlines out of the EU Finance Ministers meeting could trigger more volatility in the currency. There is no shortage of European officials speaking next week and their comments could certainly impact the euro. Aside from these event risks that will determine the long term fate of the euro, Eurozone retail sales, German industrial production, current account and trade numbers are scheduled for release and these numbers will most likely show continued weakness in the Eurozone economy.

USD: G20 WAS A DUD, NFP NOT BAD

The desire to pare back risk and park money in safer assets ahead of the no confidence vote in Greece has helped to lift the U.S. dollar slightly against many other currencies. This morning’s non-farm payrolls report also went over well with investors. Non-farm payrolls rose 80k last month with private sector payrolls accounting for 104k jobs.  The rest of the difference was made up by public sector job cuts.  Although the headline number was good enough to mitigate any downside pressure on the market, the sharp upward revisions to the September and August reports was what made investors so enthusiastic. Revisions to the last 2 reports added 102k jobs, cementing the third quarter as a period of recovery for the labor market. The unemployment rate also ticked down to 9 percent from 9.1 percent with the broader U-6 unemployment rate declining to 16.2 from 16.5 percent.  Average hourly earnings rose 0.2 percent while average weekly hours held steady at 34.3.  The manufacturing sector also added 5k jobs, which was the first month of positive job growth since July.  When it comes to assessing the impact of the non-farm payrolls report on the U.S. dollar and risk appetite, the most important question to ask is how the number plays into the central bank's monetary policy decision.  Earlier this week, the Federal Reserve surprised the market by forgoing any changes in monetary policy but comments from Bernanke indicate that QE3 is not off the table.  This morning's non-farm payrolls report ignited life into the U.S. dollar because it could be good enough to convince Federal Reserve officials to leave policy unchanged again in December.  Aside from a speech by Bernanke on Wednesday that may not touch on monetary policy, a whole host of Federal Reserve Presidents are schedule to speak. These speeches which cover a range of topics including the economy and monetary policy will be far more important than economic data this coming week because the trade balance and the University of Michigan Consumer Sentiment index are the only pieces of monthly data on the calendar. 

Aside from the non-farm payrolls releases and the Greek vote, the other main focus of the market today was the G20 meeting and unfortunately it was a dud. G20 leaders failed to agree on using the IMF to boost liquidity, which was one of the very few items that the leaders could have delivered on. Discussions on boosting the firepower of the IMF will continue to take place but this reflects the world’s frustration at putting up money for countries who refuse to take the appropriate steps to rein in their debt in a timely and aggressive manner.  Angela Merkel almost threw up her hands in defeat when she said “hardly any countries in the G20” had shown a willingness to support the Eurozone’s bailout fund. Aside from a nice group photo – nothing substantial came out of the meeting. The G20 did not adopt stronger language on currencies, calling on countries to “move more rapidly” toward more market determined exchange rates but once again, the statement stopped short of directly singling out China and in the appendix acknowledged the country’s “determination” to increase their currency’s flexibility. But then again, with China holding the largest purse strings, there was very little chance that any directly critical comments would have been made.

GBP: NO ACTION EXPECTED FROM BOE NEXT WEEK

The British pound traded higher against most of the major currencies. With no major economic reports released this morning, the strength of the pound is purely a function of the market’s assessment of the outlook for the U.K. economy versus the U.S. and Eurozone. With the Bank of England adding stimulus in the beginning of October, they have moved faster than many of their G7 counterparts and their proactiveness boosted confidence in the investment community. The U.K. government’s fiscal austerity program is moving forward as planned with monetary policy helping to offset some of the drag imposed on the economy. In contrast to other parts of Europe that are mired in disagreements and stalled processes, the U.K. is moving in the right direction and investors have applauded their efforts by buying sterling.  With that in mind however, we cannot lose sight of the fact that the U.K. economy is still struggling to recover.  There are a number of U.K. economic reports scheduled for release next week but the main event will be the Bank of England’s monetary policy announcement.   This time around, nothing is expected from the BoE which should make the rate decision a nonevent for the currency.  We also expect the latest numbers on industrial production, the trade balance and producer prices and based upon the PMI numbers, a further deterioration is expected for most of the releases. This would provide further justification for the central bank’s recent decision and will most likely keep easier monetary policy on the minds of the BoE. 

CAD: MAJOR JOB LOSSES MEANS BOC NEEDS TO EASE

Of the three commodity currencies, the Canadian dollar was the only one that endured any type of meaningful volatility. The loonie fell sharply against the greenback on the heels of weaker economic data. The latest employment report showed Canada suffering from the worst month of job losses since February 2009. With 54k jobs disappearing from the economy, the unemployment rate ticked up to 7.3 from 7.1 percent. What was particularly discouraging about the report was the fact that full time employment represented 100 percent of the job losses. A total of 71.7k full time jobs were lost compared to a gain of 17.7k part time jobs with nearly all of the job losses coming from the goods producing sector. Manufacturing activity also slowed for the second month in a row even though the underlying components of the report only showed a pullback in inventories. Overall, these two pieces of economic data will put pressure on the Bank of Canada to ease monetary policy. Central banks around the world are once again boosting stimulus vis a vis interest rate cuts or larger asset purchase programs. With evidence of weaker economic activity on hand, the BoC could lower interest rates as quickly as next month and this is one of the main reasons why the CAD could weaken further. The Australian and New Zealand dollars ended the day virtually unchanged against the greenback with no economic data released overnight. Next week, employment numbers will be released from Australia along with the latest reports of business confidence and trade activity. No major reports are expected from New Zealand but trade numbers are due for release from Canada.

JPY: FOR THE TIME BEING, INTERVENTION WORKED

Despite the sell-off in equities and the rally in the U.S. dollar against most currencies, it has been a mixed day for the Japanese Yen. The Yen traded higher lower against the U.S. dollar, holding not far from where the currency pair settled post intervention. It also retreated against the British pound but it strengthened against the Swiss Franc and Canadian.  EUR/JPY, AUD/JPY and NZD/JPY ended the day virtually unchanged. The only economic data released from Japan overnight was the weekly report of investment flows. The latest numbers showed a rebound in foreign demand for Japanese stocks and bonds and a continued appetite by the Japanese for foreign investments. Based upon the recent stability of USD/JPY, the Japanese government’s efforts so far can be deemed a success because USD/JPY has been trading within a 50 pip range for the past 3 days. For central banks, the best case scenario is low volatility in their currency and for as long as USD/JPY stays above 78, there is little reason for the Bank of Japan to spend more money on intervention. There are only a few pieces of Japanese economic data on the calendar next week and as usual, the price action of the Yen will determined by the market’s risk appetite and not Japanese fundamentals. With that in mind however, we will still be watching the country’s leading indicator reports and current account and trade balances because they will show exactly how much of an impact the strong Yen has had on the economy. The Eco Watchers survey will also be released and a small improvement is expected in the sentiment of everyday blue collar workers in Japan.  

EUR/USD: Currency in Play for Next 24 Hours

The EUR/USD will be our currency pair in play on Monday with Eurozone retail sales scheduled for release at 5:00AM ET or 9:00 GMT. This will be followed by German industrial production at 6:00 AM ET or 10:00 GMT.

After selling off sharply on Monday, the EUR/USD has spent the past week consolidating within a 250 pip trading range. The currency pair is presently range trading mode, which we determine using Bollinger Bands. Resistance is at 1.3870 which coincides with the high from today and Tuesday. If this level is broken, the level of resistance would be at 1.4050, where we have the 50% Fibonacci retracement of the May to October sell-off and the 100-day SMA. Should the currency pair trickle lower, it may find support at 1.3690, the first standard deviation Bollinger Band followed by 1.36, a former resistance turned support level. 

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.