U.S. Markets closed

Why Euro Weekend Risk Worry Traders

Kathy Lien, Director of Currency Research, GFT





  06/20 Meeting 07/31 Meeting
NO CHANGE 66.0% 66.0%
CUT TO 0 BP 34.0% 34.0%
HIKE TO 50BP 0.0% 0.0%



U.S. markets are closed on Monday for Memorial Day which for most Americans means the unofficial beginning of summer. After the month that we have had in the currency and equity markets, rest and relaxation are certainly needed. However, it will be hard to relax completely with the risk of an announcement from Europe over the weekend. Interbank dealers are sending messages to their clients assuring them they will be accessible “in case something happens” and reporters are phoning in their contacts to make sure they are available for comments. This will be one of those holidays where we will be checking our iPhones and Blackberries constantly for breaking news. Although we believe the Greeks do not have the political capacity to make a decision on the euro before their mid June elections, the U.S. market closure on Monday would give the Europeans extra time to figure out a response. Along these lines, the following week would be an even more attractive time to make an announcement with U.K. markets closed on the 4th for a Spring Bank holiday and on the 5th for the Queen’s Diamond Jubilee. A four day weekend would be even better because if Greece were to pull out of the EU because an emergency meeting of European Finance Ministers would need to be held, the European Union would need to decide whether Greece should remain part of the EU and the Troika would need to decide whether to withdraw bailout funds. The IMF could also be called on for assistance because almost immediately, Greece would be shut out of the capital markets. Central bankers around the world would need to coordinate some type of response such as emergency dollar lending measures. The point is that a lot needs to be coordinated and everyone would much rather this happen when markets are closed to avoid unnecessary speculation and volatility. A decision on euro membership may not be made this weekend but if they choose to leave the euro, there is a 90 percent chance that it will announced on a Friday after the markets close.

The EUR/USD continued to come under selling pressure and even slipped a few pips below 1.25 intraday. Without any positive news to counter the downside pressure, the EUR/USD could slip as low as 1.20 ahead of the Greek elections. Unsurprisingly, speculators are still very short euros according to the latest CFTC IMM report. Since the beginning of the month the currency pair has lost more than 5 percent of its value in a persistent downtrend that saw only 2 days of recovery. Looking ahead, barring any surprise announcements over the weekend, the EURUSD is poised for further losses. European economic data has taken a turn for the worse and there is a good chance that next week’s Eurozone confidence, German retail sales and unemployment numbers will show more cracks in the Eurozone economy. While Greece poses an imminent risk to the market, Spain is still on the radar. The country’s 10 bond yield is currently at 6.27 percent which is not a record high but close to it. Standard & Poor’s downgraded the credit ratings of 5 Spanish banks which suggest that a large capital injection from the Spanish government could be needed.


The U.S. dollar performed extremely well over the past week thanks to better than expected economic data and risk aversion. In fact, it has been a great month to be long dollars. The greenback is up more than 7 percent against the New Zealand dollar, 6 percent against the Australian dollar and 5 percent against the euro and Swiss Franc. While some investors would argue against the quality of U.S. assets, with the eye of the storm in Europe, Treasuries look like diamonds in comparison. Another piece of better than expected U.S. economic data has lent support to the dollar, which traded slightly higher against the EUR, GBP, CHF and JPY on Friday. According to the University of Michigan Consumer Sentiment survey, Americans were more optimistic than initially reported in the month of May. The UMich index was revised up to 79.3 from 77.8 compared to a reading of 76.4 in April. While the momentum in the U.S. economy remains sluggish, confidence improved for the ninth consecutive month.  Current conditions were revised lower but economic outlooks brightened. The non-farm payrolls report is scheduled for release next week and there is a good chance that the latest employment number will add to the positive momentum. Jobless claims were low this month compared to April and should therefore be consistent with payrolls growth of around 150k. Compared to the U.K. which is in recession and Europe which is poised for a deeper contraction and embroiled in a political and economic mess, even small improvements in the U.S. economy make the dollar appear more attractive. For the Fed, there is no imminent need for QE3.  With this mind however, we have to acknowledge that risk aversion is the main reason why the dollar has performed so well. Without any good news from Europe, the greenback will remain in demand but given the extreme level of long dollar positions, any positive developments could spark a quick reversal of long dollar, short the rest of the world trades. Aside from non-farm payrolls, consumer confidence, pending home sales, the second release of first quarter GDP, Chicago PMI, personal income, personal spending and the ISM manufacturing index are also scheduled for release.


While the British pound has had a very tough week against the U.S. dollar, it has performed very well against the euro. This divergent performance perfectly illustrates the dynamics in the foreign exchange market which is that investors don’t want to own any European currencies but if they had to, they still rather put their money in pounds than euros. In fact, there is an article in today’s NY Times that talks specifically about this trend. Average citizens in Europe are moving their money out of Greek, Italian and Spanish banks into German banks. Some are even considering converting part of their savings from euros to British pounds. It has only been a trickle so far and hardly a bank run but this growing trend is a reflection of the deep seated fears in Europe. If it gains momentum, sterling could enjoy further gains against the euro. Yet there is very little to celebrate about in the U.K. outside of the Queen’s Diamond Jubilee which commemorates her 60th year on the throne. The recession in the first quarter was deeper than expected, consumer spending fell significantly in the month of April while inflationary pressures are declining. As a result, Bank of England monetary policy committee members are once again thinking about possible easing with at least 2 members of the MPC expected to favor additional stimulus next month. The Queen’s Jubilee along with and a four day weekend could help to boost spending but it may not be enough to remove the need for more monetary support. Looking ahead, we have a lighter economic calendar for the U.K. this coming week. Mortgage approvals, consumer credit and PMI manufacturing are the only notable releases on the calendar. According to the Confederation of British Industry, factory orders dropped significantly in the month of May which points to the possibility of weaker manufacturing conditions across the nation.


The Australian and New Zealand dollars ended the day unchanged against the greenback while Canadian dollar extended its losing streak. It has been a volatile week for the commodity dollars as traders placed more defensive bets amid the talk of a “Grexit.” Without much major economic releases from Australia and New Zealand this week, Aussie and kiwi have traded mostly on sentiment. Heading into the new week, we have Australian retail sales and building approval on the docket. Consumer spending is expected to increase by 0.2 percent in April after advancing 0.9 percent a month prior. In New Zealand, building consent expected on Tuesday could continue to show improvement as pace of rebuilding Chirstchurch region picks up. However, business confidence could deteriorate as the eurozone crisis caused more uncertainty. Moreover, the speculation on possible China easing provided support to the comm. dollars. With impact of economic slowdowns spreading, China’s largest banks are expected to fall short of lending goals for 2012 – the first time in seven years. Premier Wen Jiabao hinted at a shift in policy with remarks highlighting the need to prioritize growth. A central bank-backed newspaper reported today that the possibility of a rate cut shouldn’t be ruled out. Should there be any easing action from Chinese central bank, we could see rallies in the commodity currencies. In the meantime, the GDP could print to the upside next Friday further supporting the loonie as Canada’s economy grew more robust. On the other hand, the current account is expected to show a deficit of C$11.1B.


The Japanese Yen ended the North American trading session virtually unchanged against the U.S. dollar and euro. Uncertainty still looms pushing traders into safer bets. Consumer prices were released overnight. The headline numbers showed a moderate 0.2 percent increase in inflation which is encouraging but far from Bank of Japan’s 1 percent target rate. Moreover, the hotter print was mainly driven by higher commodity prices with fuel advancing 4.7 percent.  Underlying inflation excluding food and energy on the other hand showed a decline of 0.3 percent. The data is a stark reminder that BoJ’s deflation fight will be long and hard. In the mean time, the central bank could face more pressure in backing up their claim of “powerful monetary easing” after staying pat at the monetary policy meeting this week. Takeshi Miyazaki, a leader of the ruling Democratic Party of Japan’s anti-deflation league, renewed calls for more aggressive action from the central bank.  The yen’s appreciation remains a major concern for Shirakawa. Although the country’s currency ended this week lower against the greenback, an escalating eurozone crisis has provided support for USD/JPY ‘s steady rise from a low of 84.17 in March to 79 earlier this week. The re-ignited strength in yen and the depressed price level could really tip BoJ to additional easing. While the meeting minutes could clarify Shirakawa and bank’s rationale for its decision, some market participants said that Governor Shirakawa could have fewer reasons to delay another round of stimulus amid deflated prices. At the end of the day however, the direction of the currency will be determined by risk appetite. Looking ahead, we have retail sales and industrial production which are expected at 6.2 percent and 0.6 percent on Monday.

EUR/JPY: Currency in Play for Next 24 Hours

Our currency pair in play for Monday will be EUR/JPY. While there are no economic releases from Eurozone, there is a small but serious risk of European government making major announcement over the week.

EUR/JPY currently trades in a downtrend which we determined using the double Bollinger Bands. The nearest support is at 98.8, the lower second std. dev. Bollinger Band. A break below that level and the pair could target the year-to-date low of 97.03. On the upside, the first level of resistance sits at the 23.6% Fibonacci retracement. We drew our Fibonacci from the high in November 2011 to the YTD. Should EUR/JPY advance farther, the pair could find major resistance at the 38.2% Fibonacci level – 102.58.