U.S. Markets closed

Some Help From ECB Please

Kathy Lien, Director of Currency Research, GFT





  06/20 Meeting 07/31 Meeting
NO CHANGE 60.0% 59.6%
CUT TO 0.00% 40.0% 39.2%
CUT TO 0.50% 0.0% 1.2%
CUT TO 75BP 0.0% 0.0%



Over the past month the euro lost more than 5 percent of its value against the U.S. dollar. During this time, the German DAX fell more than 7 percent and the CAC more than 8 percent. Ten year German bond yields have declined while Spanish 10 year yields have increased as much as 50bp since the beginning of the month. Financial markets in the U.S., U.K. and Asia have experienced just as much pain, leaving investors around the world feeling hopeless and at the mercy of the Greeks. Most major central banks around the world have refused to take additional steps until there is greater clarity on how Europe’s sovereign debt troubles and Greek’s euro membership will be handled. Unfortunately the European Central Bank is just sitting on the sidelines waiting for the heads of states in the region to end their political gridlock. It appears that Mario Draghi wants to pressure European leaders into forming a greater economic union by doing nothing. He has long favored the introduction of Eurobonds which would bind the 17 nations closer together and could become a key ingredient of a broader fiscal union. This could provide a long term solution to the Eurozone’s problems but without the cooperation of the Germans, it cannot happen. The longer this drags out the more pain for currencies and equities around the world. The EUR/USD has already fallen to 22 month lows and the next stop could be a 6 year low of 1.20.

Europe, the euro and the world for that matter desperately needs helps from the European Central Bank who has it within their power to stop the EUR/USD from falling. Their actions may not be enough to carve out a bottom in the currency pair but they could squeeze out the shorts and inject some two way action into the market. With economic data deteriorating and inflationary pressures easing, the risk of stoking inflationary pressures is nominal. An interest rate cut, additional long term refinancing operations or leaving asset purchases unsterilized are all possible solutions. It won’t be effective without fiscal reform but at least it can stem the losses. If the EUR/USD continues to fall and European bond yields continue to rise, the ECB won’t be able to stand by idly and watch things unfold from the sidelines for much longer. 

The economy is already suffering.   The Eurozone composite PMI index dropped to 45.9 from 46.7in the month of May which was the largest decline since June 2009. Both the manufacturing and service sectors experienced deeper contraction and while Germany experienced a modest decline in manufacturing and an uptick in service sector activity, France suffered greatly. Nonetheless German businesses still grew less optimistic over the past month with the German IFO index dropping 3 points to 106.9. Looking at these numbers, the recent decline in asset prices and the intensification of Europe's sovereign debt troubles, it would be irresponsible for the ECB to not consider more stimulus. 

If the ECB does nothing, the only hope then is the end of June EU Summit but between now and then Greece may make a decision about the euro. Any decisions taken at the EU Summit will be in reaction to the market’s response to the Greek elections and other breaking news. Unfortunately politics make it difficult for the Europeans to be proactive. Speculation of a Grexit will continue into the long weekend and the most important thing to remember is that while everyone would like to see Greece stay in the euro, they are all bracing for the worst.


The quest for safety continues to drive investors into the arms of the U.S. dollar. The greenback extended its gains against all of the major currencies, rising to a fresh 22 month high against the EUR and 15 month high against the Swiss Franc. This morning's U.S. economic reports shined a brighter light on the U.S. economy. There were no major upside surprises but the modest decline in jobless claims and the rebound in durable goods orders confirm that the U.S. economy is recovering. Jobless claims dropped 2k last week to 370k from an upwardly revised 372k while the four week moving average also fell 5.5k to 370k. Continuing claims dropped from 3.289 million to 3.260 million. Claims in May have been much lower than claims in April and for this reason, we are looking forward to a stronger non-farm payrolls report this month.  Durable goods orders rose 0.2 percent which was right in line with expectations. A rebound was expected after orders fell by a whopping 3.7 percent in March. Much of the rise however is attributed to transportation orders because without demand for automobiles and parts, orders declined 0.6 percent.  On a day when we have seen sharp disappointments in EZ and U.K. data, these U.S. economic reports only make the dollar a more attractive safe haven currency. The U.S. is of course not without its own problems – the pace of recovery is still very sluggish and unemployment remains extremely high. The 6.5 percent decline in the S&P 500 since the beginning of the month will also dampen consumer and business confidence. Final University of Michigan consumer sentiment numbers are due for release on Friday and no major revisions are expected. The small but deadly possibility of a Greek euro exit announcement over the weekend could continue to drive investors into the U.S. dollar over the next 24 hours.


The British pound extended its losses against the greenback and its gains against the euro.   Unfortunately U.K. economic data continues to surprise to the downside with first quarter GDP revised to -0.3 from -0.2 percent. Construction output fell 4.8 percent, worse than the 3 percent initially forecasted. With the economy slipping deeper into recession, the Bank of England could be under more pressure to supply additional stimulus. While BoE’s said its decision to stop expanding the asset purchase program was “finely balanced,” the market could see other MPC members siding with the dovish David Miles. BoE Deputy Governor Charlie Bean said in a speech this week: “If conditions do deteriorate significantly, we may need to restart the programme.” Meanwhile, Prime Minister David Cameron faces increasing criticisms for his expansionary austerity approach. As consumer spending contracted and manufacturing slowed, the prolonged cut to fiscal spending could exert more downward pressure on the British economy. Although IMF has been the original backer of Cameron’s consolidation plan, the latest IMF’s statement raised concern for UK fiscal austerity plan.   “If the economy turns out to be significantly weaker than forecast fiscal easing should be considered,” IMF Managing Director Christine Lagarde said this week in London. As a result, we could see more weakness in sterling should BoE’s stance turn more dovish amid a vulnerable economic recovery. With no economic releases from UK tomorrow, the direction of sterling could hinge on news flows from both sides of the Atlantic.


The Australian and New Zealand dollars ended the day unchanged against the greenback while the Canadian dollar continued to weaken. Overnight, we only had the release of trade data from New Zealand. While the trade balance missed expectations, the country’s monthly surplus widened in April to NZ$355 million from a revised NZ$186 million in March, Milk powder, butter, and cheese recorded the largest drop among the export products posting a 25 percent decline. The latest report is likely to raise caution for the Reserve Bank as the weakness in the local economy could slowly exacerbate amid the growing negative impact of offshore events. The demand for New Zealand exports have contracted around the world. Moreover, the weakness in New Zealand’s trade could present more challenges as Prime Minister John Key’s government aims to return to a budget surplus by 2015. In the latest government’s proposal, New Zealand Treasury also expects the Reserve Bank of New Zealand to begin raising the Official Cash Rate from its current low 2.5% in early 2013. "Strengthening demand in the economy and diminishing spare capacity are forecast to lead to a gradual withdrawal of monetary stimulus," it said in its forecasts accompanying the New Zealand government's budget. However, some market participants expect the central bank to ease its monetary policy pricing in a 50 bps cut by end of this year. Without any major economic releases, we could see the comm. dollars continue to trade on market sentiment.


It has been a mixed day for the Japanese Yen which was mostly flat against USD, CHF, EUR, GBP and lower against AUD, and NZD. The stock markets in both the US and Japan are flat and unmoved as there has been no new economic developments since yesterday. There is a lot of nervousness around the Greek crisis and the yen tends to have a higher demand in times of political, financial and economic turmoil around the world. As investors are weary of the shaky market they tend to flock to the safe haven currency. European leaders tried to come up with ways to curb the debt crisis and concerns over Greece leaving the Eurozone. Various Leaders proposed to sell euro-zone bonds at the EU summit and advised Greece to stick with the necessary austerity policies to stay in the euro. If Greece leaves the Eurozone we could see renewed uncertainty that could drive the Yen even higher. Chinese data added to the pressure in the market. According to HSBC, China, Japan’s largest trade partner experienced a deeper contraction in manufacturing activity. Recent disappointments in Chinese data could lead to additional easing measures by the People’s Bank of China. Tonight at 19:30 ET / 23:30 GMT Japan will release its CPI report and inflationary pressures are expected to remain weak. 

USD/JPY: Currency in Play for Next 24 Hours

Our currency pair in play for the next 24 hours will be USD/JPY. Tonight at 19:30 ET / 23:30 GMT Japan will release the CPI data. Tomorrow in the US, the U. of Michigan Confidence will be released at 9:55 ET/ 13:55 GMT.

USD/JPY is currently in a down trend according to our Double Bollinger Bands. The first support will be at 79.00 which is May 17th’s low and is a psychologically significant number. Should that level break then the next area of support will be the 200 day SMA at 78.56. On the upside our first resistance will be the upper second standard deviation Bollinger Band at 80.56. If the pair breaks through this level, the next resistance will be at 81.77 which is April 22nd’s high.