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How Much Further Can EUR Fall?

Kathy Lien, Director of Currency Research, GFT





  06/20 Meeting 07/31 Meeting
NO CHANGE 60.0% 60.0%
CUT TO 0BP 40.0% 40.0%
HIKE TO 50BP 0.0% 0.0%



The euro weakened against the U.S. dollar for the seventh consecutive trading day. Since the start of the month, the currency has lost more than 6.5 percent of its value, falling from a high of 1.3284 down to a low of 1.2362.  Fortunately for euro bears but unfortunately for risk appetite, the euro ended the North American trading session at its 22 month low. This tells us is that while the EUR/USD is very oversold, more investors still want to sell than buy euros.  At this point, there is no major support in the pair until the June 2010 low of 1.2150 which means we could see another 200 pip move lower in the pair before there are any sign of stabilization.  Ongoing concerns about Spain and Greece continue to drive currencies and equities lower.  With Spanish yields inching closer to 7 percent, the sustainability of Spanish finances is becoming a growing concern for investors. Rating agencies are already growing skeptical about the country’s funding abilities and sooner or later, we expect S&P, Fitch or Moody’s to follow with a rate cut. As one of our colleagues in the industry described, Spain is slowly climbing the stairs to the liquidity hospital.  They came up with a clever scheme to recapitalize Bankia but was rejected by the European Central Bank because it would increase the risk on the ECB's balance sheet.  The relative silence from European government officials can be both nerve racking and reassuring because it means they either refuse to act until Greece makes a decision about the euro or they are working around the clock on a solution to increase the region's firewall.  It certainly doesn't help that European economic data surprised to the downside, adding pressure on the ECB.  Confidence in the Eurozone fell across the board this month, which is consistent with the decline in the German IFO and ZEW surveys. German retail sales and unemployment numbers are scheduled for release tomorrow.  These are important enough releases that they could inject some life in the euro, especially if consumer spending increases materially.  Weaker numbers on the other hand will only add to the pain.  Until European policymakers break the silence the EUR/USD will have a very tough time finding long-term support.    

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With U.S. 10 year Treasury yields falling to a record low and the dollar up against all of the major currencies, it is clear that the desire for safety continues to drive financial markets. The U.S. economic calendar is light with U.S. pending home sales falling 5.5 percent in the month of April.  Softer numbers were expected given the rise in March but this decline was far worse than anticipated.  This report suggests that the momentum seen in existing and new home sales last month could begin to fade because pending home sales are a leading indicator for the housing market.  Yet a soft pending home sales report will not be enough to convince the Fed to pull the trigger on QE3 and certainly not enough to convince traders to abandon the dollar.  We would need to see a deeper slide in the asset markets, much slower job growth and a stronger contraction in consumer spending. According to Federal Reserve President Dudley, more stimulus is not necessary if growth continues. However he also believes that inflation will fall below 2 percent in coming years, which means that easy (which is different from “easier”) monetary policy could still be needed.   Another reason why the dollar has become so attractive is because the U.S. is less exposed to troubled European nations - a fact that Dudley confirms.  Looking ahead, the ADP employment report, Challenger Job Cuts, revisions to first quarter GDP, jobless claims and Chicago PMI are scheduled for release on Thursday.  These leading indicators for non-farm payrolls will set the stage for Friday’s NFP release.  Overall, we are looking for stronger numbers given the low level of jobless claims last month and any material surprises could be significant enough to affect how the dollar trades.  Tomorrow will also be the end of month which means that month end flows will come into play, if they aren’t already.  Based on the sharp slide in U.S. equities in May, fund managers will need to buy dollars to rebalance their portfolios this month

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Like the euro, the British pound sold off aggressively against the U.S. dollar despite mixed U.K. economic data. According to the Bank of England, low interest rates helped to boost mortgage approvals in the month of April. There were a total of 51.8k loans approved last month compared to 51.06k in March. This report is consistent with the increase reported in house prices but the outlook remains grim with Europe’s sovereign debt trouble and weaker growth expected to weigh on housing demand.  Net consumer credit grew at a slightly faster pace but like mortgage approvals the improvement was small.   Outside of Friday’s manufacturing PMI report, this week’s U.K. economic reports are mostly inconsequential.  For this reason, the outlook for the GBP/USD has not changed.  Bank of England policymakers are worried about consumer demand and inflation – two problems that have been exacerbated by the meltdown in the financial markets as well as Europe’s sovereign debt troubles. 


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Weaker economic data, lower commodity prices and risk aversion drove the Australian, New Zealand and Canadian dollars sharply lower today.  The price of oil fell to its lowest level since October while the price of gold dropped to a fresh year to date low.  Canadian inflationary pressures eased in the month of April according to the Industrial Product Price and Raw Material Price reports.  While the Canadian dollar weakened significantly in May, the decline in commodity prices over the past month should keep inflationary pressures in check. House prices on the other hand rose for the second straight month but the increase was modest.  While the Bank of Canada is the most hawkish G20 central bank, we don’t expect them to proceed with a rate hike anytime soon. Meanwhile according to our colleague Boris Schlossberg “ Australian Retail sales dropped for the first time in ten months sending the Aussie through the .9800 barrier in Asian session trade as risk aversion flows intensified.  Australian Retail Sales missed their mark contracting by -0.2% versus 0.2% eyed as spending at department stores fell 1 percent, and consumers spent 0.8 percent less on household goods. The report shows that consumers Down Under continue to curb their spending despite aggressive monetary easing by the RBA suggesting that Australian monetary authorities may have to lower rates further in order to stabilize demand.  Markets are now pricing a 25bp cut at the June 5th meeting with odds of a 50bp cut rising to 38%.”

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The Japanese Yen traded higher against all of the major currencies with the sharpest gains seen against the Aussie and Kiwi.  The safe haven status of the U.S. dollar and Japanese Yen has made both currencies attractive and for this reason, the losses in USD/JPY have been limited.  Manufacturing activity held steady in May according to the PMI index, which remained at 50.7 but there was weakness beneath the headlines with new export orders and output declining.  The output index was also the weakest in 5 months.  According to Bank of Japan Deputy Governor Yamaguchi, the central bank is not ruling out the possibility of further monetary easing if Japan faces more pain from Europe.  Their decision on whether to ease again will be based on whether their economy and prices undershoot their forecasts.  He also pledged to act boldly if deflation becomes an issue which is realistic given the decline in commodity prices and the rise in the Yen, both of which reduce inflation. 


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EUR/USD: Currency in Play for Next 24 Hours

Our currency pair in play for the next 24 hours will be EUR/USD. German retail sales are due for release at 2:00 AM ET / 6:00 GMT followed by German unemployment numbers at 3:55am ET / 7:55 GMT.  From the U.S. we have Challenger Job Cuts at 7:30AM ET / 11:30 GMT, the ADP Survey at 8:15am ET / 12:15 GMT along with GDP and Jobless claims at 8:30 am ET / 12:30 GMT. The Chicago  PMI index will cap the day off at 9:45am ET / 13:45 GMT.


EUR/USD is currently in a down trend according to our Double Bollinger Bands. The first area of support will be the June low of 1.2150.  If this is broken, then the psychologically significant level of 1.20 will become the next potential support. Should the EUR/USD rally, the first standard deviation Bollinger Band at 1.2550 could cap gains and if this level is taken out, then the 20-day SMA at 1.2765 becomes the next level to watch. 

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