Eur/usd - page 151
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I am watching closely and waiting for the break on the EURUSD
Eurozone/U.S. Divergence (And What That Means For The Euro)
This Great Graphic was created on Bloomberg. It depicts the US manufacturing PMI (white line) and the eurozone manufacturing ISM (yellow line).
There has been a clear divergence since the start of the year. Briefly, in January, the eurozone reading rose above the US. This had not happened before, though the eurozone time series only goes back to September 2011. The August prints make for the largest divergence since the eurozone time series began.
The lower graph, also created on Bloomberg, shows the CPI readings (US in white and eurozone in yellow). US CPI is higher than the eurozone CPI by the most since early 2010. The gap has been widening since the Q4 13.
The divergence of inflation and economic activity (using the manufacturing PMI as our proxy) lies at the heart of the divergence in monetary policy. It is this divergence that has encouraged the amassing of the large speculative short euro position in the futures market and the persistent pressure in the spot market, where the euro has fallen for seven consecutive weeks coming into this month.
Technically, the euro looks over-extended, though new lows for the move were recorded yesterday, though yesterday's range was a little more than a quarter of a cent. We think the market is turning cautious ahead of the ECB meeting on Thursday. We suspect the market will be disappointed if the ECB does not announce a QE program. An ABS purchase program would be understood as a form of QE, we think. We are under the distinct impression that ABS purchases are more complicated than many observers seem to appreciate, and the removal of obstacles is not completely in the ECB's domain. Moreover, it seems to be putting the cart before the horse if a QE program is announced before the TLTRO or asset quality review.
We think that odds are good of another cut in rates and some adjustment to the TLTRO to increase the likelihood of greater participation. This could involve cheaper funding (which is implicit by a repo rate cut) and ensuring that smaller banks that do not have access to the ECB's facilities can also participate indirectly through other financial institutions.
Disappointment with the ECB or "sell the rumor buy the fact" type of behavior could see the euro bounce. It is that bounce that investors should be prepared for and take advantage of by reducing euro exposure and/or raising hedge ratios in anticipation of the euro trending toward the mid $1.20s in the coming months.
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Euro Zone Services PMI 53.1 vs. 53.5 forecast
Euro zone service sector activity fell unexpectedly in the last quarter, industry data showed on Wednesday.
In a report, markit said that Euro Zone Services PMI fell to 53.1, from 53.5 in the preceding quarter.
Analysts had expected Euro Zone Services PMI to remain unchanged at 53.5 in the last quarter.
Euro zone retail sales fall 0.4% in July
Retail sales in the euro zone rose fell line with market expectations in July, amid ongoing concerns over the region’s economic outlook, official data showed on Wednesday.
In a report, Eurostat said retail sales declined by a seasonally adjusted 0.4% in July, meeting forecasts. Retail sales rose by 0.3% in June, whose figure was revised down from a previously reported gain of 0.4%.
Year-over-year, retail sales in the euro zone rose at an annualized rate of 0.8% in July from a year earlier, below expectations for a 0.9% gain and after rising 1.9% in June.
EUR/USD was trading at 1.3142 from around 1.3139 ahead of the release of the data, while EUR/GBP was at 0.7972 from 0.7973 earlier.
EURUSD initially fell during the course of yesterday session making yet again new lows at 1.3109, but bounced enough to create a hammer pattern. It appears that the market could get a bounce from here to the 1.32 level. Let’s see what ECB brings to the table this Thursday.
ECB to Roll Out QE? Not So Fast
Will European Central Bank President Mario Draghi unveil a massive asset purchase program, or quantitative easing, following this week’s policy meeting?
Investors certainly seem to believe that eurozone QE will happen sooner rather than later judging by the performance of the region’s bond markets. Yields on German bonds are negative out to three year maturities and are below 1% on 10-years, and they’re not much higher on French bonds either.
The latest rally in bonds, with prices trading inversely to yields, comes in the wake of Mr. Draghi’s speech at the Federal Reserve conference in Jackson Hole a couple of weeks ago which fueled a good deal of excitement about the near-term possibility of more aggressive monetary action.
But would the ECB really launch headlong into something as radical as QE this week? Well, there are a number of hurdles to clear first.
1) The ECB will probably want to wait for its June measures to be fully implemented.
The ECB launched a number of major measures at its June meeting in an effort to assure the markets that it wouldn’t allow deflation to take hold in the single currency region. The most eye-catching was a decision to impose negative interest rates on banks.
But the ECB also introduced a refinement on a previous program it had used called the long-term refinancing operation. The LTRO pumped funds into the region’s banks in the hope that they’d be lent out. Much of those funds went towards the purchase of government bonds as banks took advantage of wide spreads and the ECB’s implicit promise to back sovereigns.
This time around, the LTRO will be targeted (hence TLTRO) in a way to encourage banks to lend to the eurozone’s small businesses, which have suffered most from bank sector deleveraging and thus credit contraction.
However, the first round of the TLTRO operations doesn’t kick off until Sept. 18 and the second on Dec. 11. The ECB will more than likely want to have the TLTRO program in place and to give it time to work before it looks to introduce new measures.
This suggests it would be premature to expect any QE before the end of the year and quite possibly some time in the first quarter of next.
2) The ECB will want to have more evidence inflation expectations are dropping and thus threatening price stability, which is defined as consumer price inflation of just under 2%.
Until Jackson Hole, Mr. Draghi had been adamant that inflation expectations were well anchored. Furthermore, he argued that the decline in the region’s inflation has largely been down to weak commodity prices and a strong euro and thus doesn’t herald bad deflation.
However, in his recent speech, he acknowledged that expectations could be coming un-anchored. The ECB, however, will want more evidence of this deflationary risk before throwing itself into something as politically risky as QE. So another few months of inflation data might be in order.
3) The ECB will want to have eurozone politicians firmly on its side, including at least some leading Germans.
Although Mr. Draghi has argued that asset purchases are a legitimate part of a central banker’s armoury, not all hard money Europeans are convinced. Germans are particularly resistant. Mr. Draghi, who as well as being a canny economist is also a deft politician, will want to work on building a consensus before risking a rupture between the region’s governments and its central bank.
4) This political consensus will be easier to achieve if the German economy weakens further.
Recent industry and consumption data suggest the German powerhouse is flagging–in part because of continued eurozone weakness, in part because of Russian sanctions, but also because of generalized softening of the global economy.
A German slowdown will make it easier to argue for more monetary stimulus, especially if the German government remains reluctant to use its fiscal firepower.
Reports in the German press on Wednesday (link is in German) suggest the German government is considering stimulus measures in case the economy slows any further.
5) The ECB will likely want to wait for more development work on the European asset backed securities market before launching QE.
That’s because ECB purchases are likely to be focused more on private sector assets than government securities–after all, sovereign bond yields are already historically low and commercial banks continue to be big buyers thanks to the availability of cheap ECB finance.
The ECB has identified the lack of credit availability to Europe’s small companies as a major drag on growth. The region’s banks are rebuilding their balance sheets and will probably continue to do so for some time yet, which militates against largesse to the private sector.
One way around this banking bottleneck is if, in effect, the ECB uses its balance sheet instead by buying ABS made up of loans to small companies.
The ECB hired BlackRock Inc. to advise it on developing an ABS purchase program, but that was only a week ago.
The signs here too point towards the end of the year or early next.
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German Aug Composite PMI Revised Downwards
German private sector growth was revised to show a slower increase, final figures from Markit Economics showed Wednesday.
The final composite output index was revised to 53.7 from the flash estimate of 54.9. In July, the index was at 55.7.
The latest reading signaled the slowest rate of expansion in private sector activity in ten months. A reading above 50 indicates expansion.
Meanwhile, private sector employment levels increased for the tenth straight month, though at the slowest rate since March.
The final service sector PMI was revised to 54.9 in August. Economists had expected the PMI to confirm the flash estimate of 56.4. This marked the fifteenth consecutive month of increase.
In July, the PMI was at 56.7.
As new orders and output in the service sector increased further in August, employment levels increased, though the rate of increase was slowest in five months.
Input costs continued to increase, though at the weakest rate in four years. Output prices inflation was weakest since April.
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European repo activity recovers modestly as banks cut ECB reliance
European repo market grew modestly in the first half of this year after a sharp fall in the last six months of last year, as banks repaid cheap European Central Bank loans and relied more on wholesale funding markets.
Repos are short-term loans in return for collateral, such as government or corporate bonds, and are a key element of day-to-day financing in the economy.
A survey by the European Repo Council of the International Capital Market Association however showed that year-on-year, activity in the repurchase market, a major source of secured short-term funding for the region, shrank slightly.
The snapshot of the value of outstanding repo contracts showed the market grew to 5.782 trillion euros ($7.6 trillion) at close of business on June 11 compared with 5.499 trillion six months earlier.
The recovery contrasts with reports of cuts in repo activity by U.S. banks but reflected differences between U.S. and European markets, where the latter are not subject to quite the same degree of regulatory pressure to reduce reliance on short-term wholesale funding, the ICMA said.
"The growth in European repo may also be a sign of continuing normalisation of financial markets. Reduced reliance on the ECB, reflected in lower liquidity surpluses and repayments of the three-year LTROs (long term loans) is forcing banks back into market," it said in a statement.
A full recovery back to the pre-financial crisis peak of 6.775 trillion reached in the June 2007 survey remains some way off though. The survey's authors say current and prospective regulatory concerns are weighing on the market.
As part of attempts to curb excessive risk-taking and avert a repeat of the 2007/2008 financial crisis, regulators are pursuing plans to set minimum discounts, known as "haircuts", on the value of collateral to back repos to ensure a big enough cushion if market valuations plunge.
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German July factory orders up 4.6%, beat forecast
German factory orders rose far more than expected in July, data from the country's economy ministry showed Thursday.
In adjusted terms, orders grew by 4.6% on the month, beating expectations of a 1.2% increase in a Dow Jones Newswires survey of analysts. June figures were revised up to show a drop of 2.7%, after a 3.2% drop had been originally reported.
The ministry said that the share of bulk orders for July was well above average. Still, it said that excluding those, orders grew by 2.1%.
The data are a bit of positive news for Germany's economy, which has weathered a number of recent troubling indicators of both hard and soft data, which have brought down growth expectations for the country.
Order growth from abroad outpaced domestic orders, the data showed. Foreign orders were up 6.9% on the month while domestic orders rose by 1.7%. Among foreign orders, orders from outside the eurozone were up 9.8%, while eurozone orders increased 1.7%.
Capital goods orders were up 8.5% on the month, the ministry said, with the strongest gains coming from orders from outside the eurozone, which were up 14.6%.
Dutch CPI 1.0% vs. 0.7% forecast
Consumer price inflation in the Netherlands rose unexpectedly last month, official data showed on Thursday.
n a report, EcoWin AB said that Dutch CPI rose to 1.0%, from 0.9% in the preceding month.
Analysts had expected Dutch CPI to fall to 0.7% last month.