Week in FX Europe – US NFP Eases Pressure on ECB Weakens Euro

The European Central Bank maintained the benchmark interest rate at 0.15% at its July policy meeting held this week. Mario Draghi noted that inflation rates remain very low, and said that the ECB was ready to implement “unconventional instruments” if necessary. As well, Draghi reiterated that the ultra-low interest rates would remain at current levels or lower for the foreseeable future. The highlight of his press conference was the deeper explanation of how the TLTROS work. The Targeted Longer Term Refinancing Operations (TLTROS for short).

The TLTROs are designed to enhance the functioning of the monetary policy transmission mechanism by supporting bank lending to the real economy.

Under the scheme, banks will initially be able to borrow an amount equivalent to up to 7% of a specific part of their loans in two operations in September and December 2014. After this, additional amounts can be borrowed in further TLTROs, depending on the evolution of the banks’ eligible lending activities in excess of bank-specific benchmarks.

The additional borrowing allowance is limited to three times the difference between the net lending since 30 April 2014 and the benchmark at the time it is claimed.

The EUR has now broken below its 20-DMA at €1.3602 and has fallen to a fresh low (€1.3587). It looks like the EUR may have peaked last Monday (€1.3701). Momentum is slowly pushing the single unit to revisit its recent €1.3503 low. If momentum can be sustained, €1.3480 opens up a host of opportunities.

German data was dismal this week, as the largest economy in the Eurozone is showing signs of distress. The week started with Retail Sales, the primary gauge of consumer spending, posting its third straight decline.

Unemployment Change, which had posted strong declines earlier in the year, has reversed direction and recorded two straight gains, pointing to trouble in the employment sector. In June, the indicator came in at +9K, compared to an estimate of –9K. There was no relief on Friday from Factory Orders, which dropped by 1.7%, its second decline in three readings. The indicator fell far short of the estimate of –0.8%. Further weak numbers out of Germany could lead to the euro falling even further. Germany remains the engine of growth in the Eurozone and it appears that the situation in Ukraine-Russia and the high EUR are taking its toll.

June’s nonfarm payrolls (NFP) report was much stronger-than-expected. With both the NFP and ADP’s June National Employment Report figures (+288K versus +212K expectations) crushing expectations, unemployment has dropped to +6.1% in the U.S. Even the revisions impressed; April’s NFP was revised up to +304K from 282K.

Strong recovery signals from the US and mixed to negative indicators in Europe depreciated the EUR versus the USD. France and Italy continue to drag the rest of the Eurozone with no recovery in sight unless the ECB steps up and triggers both conventional and unconventional measures it has alluded to in the past.

Next week in Europe
After the Super Economic Data Thursday this week the market will spread it around with releases from Asia, Europe and the Americas. Monday will bring Canadian Housing and PMI numbers with both expected to rise above their previous print.

China CPI will bring an insight into Chinese inflation on Tuesday. The FOMC minutes from the June meeting will be released on Wednesday. Later that day there will be an awaited employment numbers from Australia. The Bank of England takes center state this week with their rate setting meeting due for Thursday. Canadian employment figures close the week on Friday.