Eur/usd - page 44
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Goldman's Stolper Opines On The EUR, Says ECB Rate Cut Is A Buying Opportunity
After briefly becoming the strongest currency in the world for 2013, yesterday's stunning inflation report out of the Eurozone has not only left the massively overblown European recovery story in tatters (but... but... those soaring PMIs, oh wait, John Paulson is investing in Greece - the "recovery" is indeed over), has sent the sellside penguins scrambling with the new conviction that the ECB now has no choice but to lower rates once again, either in November or in December. So with everyone confused, we were hoping that that perpetual contrarian bellwether Tom Stolper, who just came out with a report, may have some insight. And sure enough, while the long-term EUR bull admits that "the ECB could move the EUR/USD cross by about 5 big figures by cutting the refi rate by 25bp" and that "it is quite possible that we will see EUR/$ drop further towards 1.33", he concludes that "an ECB rate cut could turn out to be a buying opportunity to go long the EUR." And now we know: because what Stolper tells his few remaining muppets to buy, Goldman is selling: if and when the ECB cuts rates, do what Goldman does, not what is says: sell everything.
From Goldman's Tom Stolper
Should the ECB respond to a strong Euro?
On a trade-weighted basis, the EUR is the strongest currency globally – Earlier this week the EUR was briefly the strongest currency globally in 2013. On our GS Trade-Weighted Indices, it peaked at +5.9% year-to-date, outperforming by a whisker the CNY at 5.7%, with the Dollar remaining far behind at +2.0%. Apart from the fact that this has surprised consensus expectations for 2013, it is also becoming a headache for the ECB. At every post-meeting press conference President Draghi faces a number of questions about the exchange rate. In addition, our GSDEER fair value framework implies that the EUR is now overvalued by about 14% against the Dollar and by about 5% on a trade-weighted basis.
The Euro area’s current account position stands in contrast to the EUR valuation signals – Most FX valuation models, including Purchasing Power Parity, are ultimately trade arbitrage models. If goods are substantially cheaper in one country than another, the chances are that people will buy more of the cheaper goods and the resulting demand for the currency in the producer country will help correct the undervaluation. A strong currency over-valuation signal therefore often coincides with a trade deficit and a subsequent correction, as we have seen in EM deficit countries recently. In the Euro area that is not the case. Despite overvaluation, the Euro area currently is not running a current account deficit; in fact, it has the largest surplus ever at about 2.5% of GDP (Germany's is 7% of German GDP). Even vis-à-vis the US, where the EUR is overvalued by 14%, the bilateral Euro area trade surplus currently stands at historical record highs. The opposing current account and valuation signals considerably complicate the case for a weaker EUR.
Euro weakness would theoretically deepen imbalances – Of course, one of the reasons why the Euro area current account surplus has been growing has been slowing domestic demand depressing imports. Using a weaker Euro to substitute domestic demand would support growth but likely increase the imbalances. At least theoretically, the currency depreciation would raise the trade surplus even further. From a G-20 point of view this would be a very controversial policy (even if officially aimed at inflation alone). Already the US is criticising the German government for not stimulating domestic demand more, and the idea of pushing the EUR lower to help growth is met with scepticism in Asia.
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EUR/USD weekly outlook: November 4 - 8
The euro fell sharply against the dollar on Friday as expectations that the European Central Bank may cut rates weighed, while the dollar was lifted after unexpectedly strong U.S. manufacturing data reinforced the view that the Federal Reserve could start tapering stimulus sooner than expected.
EUR/USD ended Friday’s session at 1.3492, 0.68% lower for the day. For the week, the pair lost 2.15%.
The pair is likely to find support at 1.3425 and resistance at 1.3570, the high of October 15.
The euro slid after data on Thursday showing that euro zone inflation fell to a four year low in October raised concerns that the ECB may ease monetary policy as soon as this week to help shore up growth.
Eurostat said consumer price inflation in the currency bloc slowed to 0.7% in October, the slowest pace since November 2009, from 1.1% in September.
A separate report showed that the euro zone unemployment rate rose to a record high 12.2% in September.
The dollar was boosted after unexpectedly strong U.S. manufacturing data added to expectations that the Fed could start to taper its asset purchase program as early as next month.
The Institute of Supply Management said its manufacturing purchasing managers’ index rose to 56.4 in October, the highest since April 2011, from 56.2 in September. Economists had expected the index to tick down to 55.0.
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ECB may soon join the flight of the doves
Even as the euro zone economy shows faint signs of stirring, the European Central Bank is likely to send a dovish message this week that more monetary help will be on the way before long.
After a plunge in inflation to 0.7 percent in the year to October, well below the ECB's target of just under 2 percent, UBS and RBS are among those who reckon a rate cut could come as soon as Thursday's policy-setting meeting.
At the very least economists expect ECB President Mario Draghi to indicate that the balance of risk has tilted toward further easing, partly because the recent strength of the euro will hurt exports with a lag.
But many believe it would make more sense for the ECB to hold fire until December, when the bank's staff updates its growth and inflation forecasts.
"A significant downward revision to its inflation number for next year - let's say at or below 1 percent, from 1.3 percent currently - may push the ECB to act," said Giuseppe Maraffino, a bond analyst at Barclays.
ALL OPTIONS OPEN
A cut in the ECB's main refinancing rate, now at 0.50 percent, would have the greatest headline impact.
Other options include a reduction in the deposit rate to below zero, which would have a bigger effect on money market rates, or a promise of another long-term refinancing operation to ensure banks have plentiful liquidity.
Sarah Hewin, an economist with Standard Chartered Bank in London, agreed that disinflation made the case for a rate cut more compelling. But she said there were signs the euro zone's economy was turning up.
The ECB's latest bank lending survey provided evidence that credit constraints might soon ease, while struggling members of the euro zone periphery appear to be touching bottom. Spain returned to modest growth in the third quarter.
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ECB really must act on deflation
The case for looser monetary policy should be clear when the European Central Bank governing council convenes in Frankfurt on Thursday. The question is what tools to use: lower interest rates, spraying the banks with more cheap long-term money or the ECB’s first dose of “quantitative easing”. The answer should be a mixture of all three.
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New European bank rules should come sooner, says ECB
New rules for Europe wide banks should be in place by 2015
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EU Lowers Euro-Area Growth Outlook
The European Union trimmed its forecast for euro-area growth next year and raised its unemployment estimate as the economy struggled to regain momentum after a record-long recession.
Gross domestic product in the 17-nation currency bloc will rise by 1.1 percent in 2014, less than the 1.2 percent forecast in May, the Brussels-based European Commission said today. Unemployment, now at its highest rate since the euro was introduced, will be 12.2 percent in 2014, higher than the 12.1 percent predicted six months ago.
“We are seeing clear signs of an economic turnaround, but growth will pick up only gradually and will translate into jobs only with a lag,” EU Economic and Monetary Affairs Commissioner Olli Rehn told reporters in Brussels. “We must not fall into the trap of complacency. Further decisive action to boost sustainable growth and job creation will continue to be necessary in Europe.”
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Euro falls on ECB speculation; data lifts dollar
The euro fell against the dollar on Tuesday, hurt by speculation the European Central Bank may signal easier monetary policy or even cut interest rates this week.
Adding to the dollar's strength was data showing a pick-up in U.S. services-sector activity, which could strengthen the case for the Federal Reserve to start scaling back stimulus later this year.
ECB policymakers meet on Thursday. Falling inflation and forecasts that the euro zone economy will expand slightly more slowly next year than previously expected have added to calls for an interest rate cut, possibly as early as this week.
"In the next week or two, we could see continued euro weakness, but that's all going to depend on the ECB," said John Doyle, currency strategist at Tempus Inc in Washington.
The euro fell 0.3 percent to $1.3475, having hit a session low of $1.3448, according to Reuters data, and edging back toward a seven-week trough of $1.3441 set on Monday.
Asmara Jamaleh, currency strategist at Intesa Sanpaolo in Milan, said while she does not expect the ECB to take any action on Thursday, the euro is likely to stay weak due to divergent euro zone and U.S. economic outlooks.
But she noted that the euro's recent fall has been "very large" since the release of inflation data. Further losses would be limited as long as the euro remained above chart support around $1.3425. Over the next few months it could drop below $1.30, she said.
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ECB's Asmussen: Eurozone Recovery Still "Very Green"
Euro area economic recovery is continuing, but remains very weak, warranting careful nurturing, European Central Bank Executive Board Member Jorg Asmussen said on Tuesday.
"The turning point in economic activity that we saw earlier in the year has not reversed," Asmussen said in a speech in Stockholm.
"Hard and soft data seem to suggest that the shoots of a recovery are there, yet they are still very green and need to be nurtured carefully."
Earlier today, the European Commission forecast 0.4 percent contraction for Eurozone this year. The economy of 18 countries following the euro is expected to grow 1.1 percent next year.
"The recovery is indeed weak, fragile, and uneven," Asmussen said. "We are basically running on one engine - net exports; the other engine - domestic demand - is sputtering but has not yet really taken off."
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Euro hits day's high on strong German industry orders
The euro rose to a session high versus the dollar on Wednesday after data showed a much bigger-than-expected rise in German industry orders.
Orders jumped by 3.3 percent on the month during September, against forecasts for a rise of 0.5 percent.
The euro rose as high as $1.3533 after the data, up from around $1.3507 beforehand.
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Euro Rallies on Prospects ECB to Hold
The euro rose against the dollar and the yen as a gauge showed the region’s services output increased more than initially estimated, boosting speculation the European Central Bank will refrain from cutting interest rates tomorrow.
The dollar fell from almost a seven-week high before data tomorrow that analysts said will show gross-domestic-product growth slowed last quarter and as two Federal Reserve research papers said slack in the economy justified an accommodative stance. The yen slid as Japan’s Topix Index (TPX) of shares rose 0.8 percent, damping demand for the currency as a haven. New Zealand’s currency climbed to a two-week high on jobs gains.
“The euro was lower in recent sessions because of the increased expectation the ECB will cut rates tomorrow -- we don’t think they’re likely to,” Eric Viloria, a senior currency strategist at Gain Capital Group LLC in New York, said in a phone interview. “They’ll probably hint at a rate cut in the future.”
The euro strengthened 0.4 percent to $1.3523 at 12:22 p.m. New York time after declining to $1.3442 on Nov. 4, the weakest level since Sept. 18. The common currency rose 0.5 percent to 133.38 yen. The dollar strengthened 0.1 percent to 98.63 yen.
The Bloomberg U.S. Dollar Index, which tracks the greenback against 10 major currencies, dropped 0.2 percent to 1,013.53 after rising to 1,017 on Nov. 4, the highest since Sept. 18.
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