Euro treads water on confusing influx of developments

A mix of Euro positive and Euro negative developments today and ahead of the Italian election this weekend, with results possibly not clarified until as late as Wednesday next week.

The Euro slipped lower in the European session as the ECB announced that banks would only be repaying 61.1B of the second 3-year LTRO next week, versus consensus estimates well north of 100B. There was no follow through however, perhaps due to the unwillingness to commit on a position until the other side of the Italian election and due to the very strong German IFO data today.

Euro – Italian election and odd ECB comments

It’s interesting to see an ECB official actually going out of his way to indicate that “the current level of the euro is absolutely not a problem” rather than keeping quiet on exchange rates or saying something more neutral on exchange rates having a bearing on the economy and through that transmitting to monetary policy. It seems that most are reluctant to engage in any rhetoric against the market’s assessment on currencies and in the currency war theme.

On the Italian election, the consensus seems to be that Bersani’s centre/left should be able to eke out enough of a victory to form a coalition government with Monti, but there is considerable uncertainty on the potential for Berlusconi’s showing and in particular, how strongly Grillo’s Five Star Movement will poll.

This sets up a fairly predictable reaction pattern in the first instance assuming we close today somewhere in the 1.3150/1.3200 range – a kneejerk reaction higher depending on how solid the Bersani victory is and perhaps a 1.3000 test if the outcome is extremely unclear and risks a hung parliament. I’ve no opinion on the odds of either scenario, but it feels to me like much of the Euro downside has been about risk and bond market correlations of late, with only a small degree of nervousness on Italy priced in, so a weak outcome for Bersani could have an exaggerated reaction (perhaps high momentum near term EURGBP downside representing an interesting trade on that account).

Aussie goes ballistic on Stevens comments

Aussie jumped higher across the board on a bit of rhetoric from the RBA’s Stevens, who testified before the parliament overnight. He made positive noises on the economy and suggested there is significant stimulus “in the pipeline” from the interest rate moves made by the RBA to date. On the exchange rate, he indicated the AUD is “somewhat” overvalued but clearly wanted to step away from the idea that it was egregiously overvalued or required any intervention. His rhetoric on the exchange rate moved currencies far more than the forward yield curve, a somewhat weak response (i.e., let’s see what early next week brings). Still, this does underline the support in the 1.0225/1.0250 area in AUDUSD, while the resistance/upside pivot zone is the 200-day moving average around 1.0325 up to perhaps 1.0375.

CAD weak on weak data/crude oil

WTI crude oil prices have plummeted in recent days and weak data from Canada out today - particularly in retail sales - pushed the currency lower still to new lows against the US dollar since last July. USDCAD is in fact pushing a the 200-week moving average, above which it hasn’t closed since July of 2009.

Looking ahead

Next week may be slow to “get started” as Italian polls don’t close until early afternoon Monday and results may not be firming up until Wednesday.

Next week will be interesting for round out the picture on the US manufacturing sector after a confusing combo of the blowout positive Empire Survey being followed up with the very weak Philly Fed survey this week. The ISM is on Friday after the other regional surveys dribble in all week.

Next week should also help confirm whether this break of the key 1.3300 area support in EURUSD will lead to further losses down the road and underline that the highs are in. I think the rally’s back has been broken, but am less confident about whether we simply collapse lower from here to the next major area at 1.3000, or whether there is a near term risk of a test of the 1.3300/25 resistance or even an more significant throwback rally before we eventually head lower further out.

Interesting that JPY crosses have “gone quiet” as they digest that big previous move. Bond markets suggest we should be leaning on more consolidation, and there is endless room for such without threatening the overall JPY weakening trend.

A pair of Fed officials were out jawboning yesterday – the St. Louis Fed’s Bullard saying that the interest rate could actually be hiked by mid-2014 as the unemployment rate is likely to drop to 6.5% by then and the San Francisco Fed’s Williams saying that Fed QE purchases will be needed well into 2013 – duh…

Interesting reads:

Bloomberg article: Bernanke not afraid of bubble blowing (Whew – we all know how visionary he has been on this front – particularly about the US housing bubble): 

FTAlphaville: Are rates mispriced or are investors missing something? 

Bloomberg: Spain’s Deficit widened to 10.2% on Bank Rescue Cost: And 2014 expected to show 7.2% of GDP budget gap vs. original 2.8% target (and that’s likely wth optimistic assumptions. Europe’s trajectory on the periphery is rapidly destabilizing again even if it’s difficult to find an instrument that measures this because of the ECB backstop.

Economic Data Highlights

• Sweden Feb. Consumer Confidence out at -1 as expected and vs. -2.9 in Jan.
• Sweden Feb. Manufacturing Confidence out at -11 vs. -15 expected and -17 in Jan.
• Germany Feb. IFO Business Climate out at 107.4 vs. 104.9 expected and vs. 104.3 in Jan.
• Italy Feb. Consumer Confidence out at 86.0 vs. 84.6 in Jan. and vs. 84.7 in Jan.
• Italy Dec. Retail Sales out at +0.2% MoM and -3.8% YoY vs. -3.2% YoY expected and -3.1% in Nov.
• Canada Jan. Consumer Price Index out at +0.1% MoM and +0.5% YoY vs. +0.2%/+0.6% expected, respectively and vs. +0.8% YoY in Dec.
• Canada Jan. Core CPI out at +0.1% MoM and +1.0% YoY vs. +0.2%/+1.0% expected, respectively, and vs. +1.1% YoY in Dec.
• Canada Dec. Retail Sales out at -2.1% MoM and -0.9% less Autos vs. -0.3%/+0.2% expected, respectively

Upcoming Economic Calendar Highlights (all times GMT)

• US Fed’s Powell and Rosengren to Speak (1515)
• Japan Jan. Corporate Service Price Index (Sun 2350)
• China Feb. HSBC Flash Manufacturing PMI out (Mon 0145)