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Concerns of slowing growth in the Eurozone is putting pressure on the euro

Thu, Aug 7 2008, 07:51 GMT
by Union Bank of California Team

Union Bank of California

USD -- The greenback traded along an uneven path last week, as markets frantically sought insight into the health of the world’s largest currency and direction for its currency.
Employment was the theme of last week as key data releases helped to paint a picture of the lackluster labor sector climate in the US. Initial Jobless Claims rose to a seasonally adjusted high during the week ended 7/26 (448K vs. 404K prior), while the ADP Employment report surprisingly revealed an uptick (+9K in Jul. vs. -77K prior). The key headline events for last week were Friday’s NFP report (-51K in Jul. vs. -75K exp.) and Unemployment Rate announcement (5.7% in Jul. vs. 5.5% prior). While the USD was initially buoyed by the better-than-expected NFP, the rise in the Unemployment rate helped to contain the dollar’s enthusiasm. In light of the uncertainty and weakness that still persists in both the critical housing and labor sectors, the specter of rising inflation has had to be largely ignored by Fed policy makers, resulting in the undesirable phenomenon known as “stagflation”. Therefore, all eyes will be focused on tomorrow’s FOMC meeting. Though it is largely expected that the Fed will hold rates steady at 2.0% (Fed Fund futures are only pricing-in a mild 6% chance of a 25-bps rate hike), the subsequent policy bias statement will be the real event risk. Any inflation-focused rhetoric could easily serve as a catalyst for a dollar rally, while dovish comments by Fed officials, could serve as an excuse to jettison the greenback. With Factory Orders on the rise this morning (1.7% in Jun. vs. 0.7% exp.) and tomorrow’s ISM Non-Manufacturing report expected to be benign, markets are cautiously optimistic for dollar strength.

EUR -- Concerns of slowing growth in the Eurozone is putting pressure on the euro. The single currency has fallen steadily from highs of 1.5768 last week to lows near 1.55.
Weighing on the euro are a slew of weak economic releases pointing towards an economic slowdown. The Eurozone Consumer Sentiment Index slid to -20, while the Economic Sentiment reading dropped to 89.5, highlighting a weakening in both the industrial and services sectors. E-15 business climate also fell into negative territory at -21, while unemployment rose to 7.3%. Nevertheless, inflation remains at a persistent 4.1%. While the euro is presently supported at technical support levels of 1.55, a Eurozone slowdown will increase pressure on the euro as the economy shows further signs of slowdown.

JPY -- The yen remained weak against the dollar on Monday as the greenback rose on lower crude oil prices and higher US core inflation data. A major resistance level of 108.50 has stood since January, but may be poised for a break-through depending on the US Fed’s upcoming rate decision. Also weighing on JPY is fading “carry-trade” conditions as concern over risk is potentially overshadowing expectations for returns on diminishing interest rate differentials between Japan and the US. Japanese orders from abroad fell for the first time in 4 years as the global slowdown has dampened demand, and small business confidence fell for the fourth month in July to its lowest level in 6-years. Meanwhile, Japan’s new finance minister, Bunmei Ibuki, commented there was a risk of the economy falling into “stagflation” brought about by high raw material prices, and that it was difficult for the BoJ to move now given its limited policy options and severe fiscal conditions.

GBP -- The British pound is near 1-month lows at 1.9654 as jittery markets await results from UK banks this week. The banking sector is seen as a barometer for the broader economy, which has been grappling with the dilemma of a falling real estate market and rising inflation. Housing prices fell -8.1% in July y/y, contributing to a slide in the Consumer Confidence Index to -39 in the same period. The BoE is expected to hold rates steady at 5% at the conclusion of its meeting on Thursday despite inflation at 3.8%—nearly double the 2% target rate—due to weak economic conditions.

CAD -- The loonie remained weak against the greenback on Monday, a national holiday in Canada. On Friday, CAD fell against the USD—its eighth decline in the past nine sessions—after recent data pointed to a stumbling economy and market expectations that the BoC’s next move will be an interest rate cut. The currency hit its weakest level since June 16, pressured by the slowdown in the US where it sends over three-quarters of its exports.
The economy shrank an annualized 0.3% in Q1, and data on Thursday showed it continued to flounder in June, declining by 0.1%.

MXN -- The peso remains well-bid today after hitting a 6-year high of 9.9070 against the dollar on Friday amid speculation that the Central Bank could further raise interest rates.
Banxico warned that inflation will be much higher over the next two years than previously forecast, increasing expectations of an additional rate hike beyond the benchmark’s current 8%. MXN has appreciated more than 9% versus the USD this year.

CNY -- The Chinese yuan is lower at 6.8515 following a statement by authorities to revise rules governing FX management. The announcement was interpreted as a decision to slow the pace of yuan appreciation. The Chinese central bank exchange rate fixing at 6.8471 was also lower for the fourth consecutive day.

Last Week’s Currency Highs and Lows and Forecast

U.S. Economic Indicators

Published on  Thu, Aug 7 2008, 07:58 GMT