Euro at Cross Roads?

Currency in Crisis

A well received Italian bill auction coupled with hopes of a near-term Greek deal has seen the euro recover from the slide in North America yesterday.  The euro came within about 20 points of yesterday's high after slipping to just below $1.3080 in Asia.  Short-term technical indicators warn the euro is over-extended a convincing break of that $1.3080 to boost confidence a near-term top is in place. 

In some ways this is consistent with the recent pattern for the euro to do well in the run-up to a European heads of state summit (Monday) to sell off afterward.  Note too that the balance of European bond maturities and coupon payments falls considerably behind the new anticipated issuance in February.  The return of the Chinese market from the lunar new year celebration may also be a factor, though the directional implication is not clear. 

The Baltic Dry Index has collapsed 40% since the end of last year.  It is approaching levels not seen in more than 3 years.  The implication that many will draw from this is a poor signal of Asian economic activity.  

There are two highlights from Europe outside the increased hopes, fanned by official comments, of a Greek resolution.  First, money supply for the euro zone came in well below expectations at 1.6% year-over-year basis.  The market expected a 2.2% pace after 2.0% in November.  The 3-month year-over-year pace that the ECB looks at to smooth out some of the volatility slowed to 2.1%, down from 2.5% in November.  Moreover, lending to the private sector continued to dry up.  It rose 1% year-over-year from 1.7% in November.  A Reuters survey showed expectations were for a small increase.  

This illustrates that the emphasis on the explosion of the ECB's balance sheet (with relatively poor quality assets relative to the Fed of BOE) may be misleading as, like the Fed's excess reserves, little is dripping into the real economy.  In addition, the weakness in the monetary aggregates may encourage ECB officials to deliver another rate cut, even if not next month. 

The second development to note in Europe is the weaker than expected Swiss KOF survey, posting its first negative print (-0.17) since August 2009.  The market had expected a negative reading (-0.05) down from 0.1 in December.  It warns of the risk that the Swiss economy may be contracting. 

The focus on the Swiss franc is against the euro presently as the market has approached the cap that the central bank imposed last year.  That cap for the franc is a floor for the euro at CHF1.20.  The market does not know when the SNB will show its hand, but the current thinking is below CHF1.2050, which explain why that area is holding this week.  The euro has to resurface above the CHF1.2120 area to ease the pressure. 

Since mid-week, the yen has been the strongest G10 currency, appreciating 1% against the greenback and almost 0.7% against the euro.  There appears to be three considerations.  First, on Wednesday the dollar tested the 200-day moving average near JPY78.35, which also corresponded to the upper end of a range that has persisted for a couple of months.  Technically this appeared to attract dollar sellers. 

Second, this provided an opportune time for Japanese exporters believed to be conducted month-end repatriation.  Third, the  key fundamental factor is not an intensification of global financial tensions (as illustrated by the rally in global shares this week and decline in most peripheral European bond markets).  Rather the easing of Fed policy and the decline in US yields seems to be the main weight on the dollar.   

The lower rates and the ongoing uncertainties shrouding Europe is thought to discourage Japanese investors from buying foreign assets, mostly consists of bonds.     Dollar support is likely to be seen near the trend off the early Jan and mid-Jan lows, coming in now near JPY76.60.  It will take a move back above JPY77.20 to stabilize the tone.