Week in FX Europe – Bank of Japan and Fed pressure ECB both ways

• ECB Bank Stress Tests results stress EUR


• German Confidence falls again in October


• BOJ and Fed in the driver seat of Global monetary policy

The results of the European Banking Authority (EBA) stress tests were published on Sunday and so began a hard week for the EUR. Twenty four banks failed the stress tests, with Italian banks on the spotlight as nine found themselves on the black list. There is a 25 billion capital hole for the European financial system.

EUR/USD continued to lose ground, as the pair trades in the mid–1.25 range after trading below 1.25 as a reaction to the Bank of Japan stimulus announcement. In the Eurozone, German Retail Sales posted a sharp decline of 3.2%. French Consumer Spending came in at –0.8%.

It’s been a rough week for German releases, as the Eurozone’s largest economy continues to struggle. The Ifo Institute Business Climate survey fell to a six month low. Germany depends on exports to grow and it is now under threat from geopolitical turmoil such as the situation in Ukraine and with monetary policy moves such as the ones announced this week by the Bank of Japan and the U.S. Fed.

On Friday, German Retail Sales were dismal, plunging by 3.5%. This marked the sharpest decline since October 2007. The markets had expected a decline of 0.8%. Consumer Climate and CPI softened in September, although Unemployment Change was better than expected. Meanwhile, Eurozone CPI edged upwards to 0.4%, matching the forecast. Core CPI and the Unemployment Rate remained unchanged, at 0.7% and 11.5% respectively.

The European Central Bank will release its minimum bid rate announcement next week where no change is expected followed by a press conference. ECB President Mario Draghi will continue to struggle as he has no answers for the market questions. He will redirect the attention to the EU governments who need to step up their commitment to growth by allowing sovereign debt to be part of the stimulus menu. Without that, the ECB has its hands tied as there is only so much that can be done. On the other hand it has left the market speculating about other options and even the rumours of corporate bond buying have trigged EUR negative moves.

The Bank of Japan was under pressure as Abenomics was running out of steam and the 2% inflation goal in a two year timeline was getting further away. In a surprise move the BOJ added to its current stimulus and gave the market the signal to take more risk. The flip-side of this action was the U.S. Federal Reserve which announced the end of quantitative easing and although giving no time commitments is on track to raise rates next year. The ECB by comparison stands alone as a Central Bank who needs to act, but it is prevented from doing anything meaningful by the European political quagmire. Both CBs put pressure on the ECB, that hopefully it can help to help unlock the EU’s divisions amongst nations regarding the much needed stimulus.

Next week in Europe

There are two major events during the week. The Bank of England and the European Central Bank will announce their benchmark rate. As with the RBA there are no changes expected as the BOJ seems to once again lead with example on the stimulus front as it did in 2013. The BOE could take a cue from the Fed and begin cutting back on its bond-buying program, but that seems unlikely given the dark clouds that have begun to appear above the UK economy and upcoming elections next year reward prudence over speedy action.

The U.S. Non-farm payrolls will be published on Friday. The biggest economic indicator in the forex market can further validate the Fed’s decision to end its quantitative easing program off the table and build more confidence in the growth of the U.S. economy. This in turn would boost the USD strength versus all pairs. Last month’s figures came in at 248,000 added jobs and while expectations are for a lower number as long as it is above 200,000 it can justify the strong USD position.

For more market moving events visit the MarketPulse Economic Calendar

WEEK AHEAD

* USD ISM Manufacturing

* AUD Reserve Bank of Australia Rate Decision

* NZD Unemployment Rate

* AUD Unemployment Rate

* GBP BOE Asset Purchase Target

* GBP Bank of England Rate Decision

* EUR European Central Bank Rate Decision

* USD Change in Non-farm Payrolls

* CAD Unemployment Rate

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Week in FX Europe – ECB Bank Tests Stress EUR

• European Bank Stress tests to be published Sunday


• BOE Minutes show dissent and lower for longer interest rate


• German PMI recovers but France still lags

The European Bank Authority will release the results from tests designed to measure the financial strength of 150 of the EU’s biggest banks. There have been reports that as many as 25 banks could fail the stress tests. The main goal of the tests is to reassure global investors that the European financial system is solid and there is no need for concerns. This of course is a lofty objective given the economic turmoil surrounding the Eurozone and in particular given the political quagmire that has prevented the European Central Bank to unleash monetary stimulus.

The BoE’s MPC last met on October 9 and announced there would be no change in the benchmark rate of 0.5% or the size of the bank’s bond-purchase program of £375 billion. The last time the minutes were released, they shed light on the dissent from two members who were in favor of raising rates by 25 basis points, but they were outvoted. The October minutes showed similar dissent.

The two dissenters were Martin Weale and Ian McCafferty. Their main arguments for a rate hike were that the labour market could recover ahead of a current rate hike and that the UK economy was not affected by EU financial contagion.

Economic conditions have not improved, and in fact they have worsened in some parts of the world, so it came as no surprise that the BoE did not change its monetary policy.

The majority of the MPC is concerned with European growth and comments from the BoE’s Chief Economist last week are probably telling of the more downbeat reading of the U.K. economy. Andrew Haldane said he was “gloomier” with the direct implication that rates would remain lower for longer.

European PMIs continue to be mixed. German manufacturing figures beat expectations with a 51.8 factory output preliminary result after a disappointing 49.9 reading last month. The fact that Germany’s flash PMI is above 50 is a sign that the contraction was transitory. In contrast French flash PMI came in lower this month than last. October figures are 47.3 coming in below expectations that the factory output from France would be close to that reported last month of 48.8. It seems that the reduction of the speed of contraction in French manufacturing was also transitory.

The European flash PMI had a net positive gain thanks to the German growth. The PMI rose to 50.7 in October beating expectations that the eurozone would show contraction. The expectations were heavily influenced by the surprise decline in German manufacturing in September.

The results shine a positive light on Europe’s chances of avoiding a recession although a lot of work needs to be done on the political arena to unlock the quagmire that has prevented the European Central Bank from deploying a more direct quantitative stimulus package. The situation is so delicate than even the rumours of corporate bond buying had a deep and lasting effect on the EUR/USD even though the ECB later denied that there was a clear plan on such purchases.

Next week in Europe

This week will kick off on Sunday as the European Central Bank (ECB) will release the results from the Bank Stress Test results. Reports emerged today that as many as 25 banks will fail the tests. Earlier articles singled out 11 banks. The ECB has declined to comment until the actual test results are released.

The biggest event next week will be the US Fed’s Federal Open Market Committee (FOMC) interest rate decision on Wednesday. There are no rate change expectations, but there is a lot of anticipation as this will mark the final bond-buying cycle as the Fed positions itself to raise rates in 2015.

The final USD Gross Domestic Product figure will be reported on Thursday. The expectation is for a drop in the rate from the impressive Q2, but still a strong 3.0%. The trends that emerge after the FOMC will be validated or netted versus the US Economy’s GDP final number in the third quarter.

Later in the week inflation becomes a major trend to watch as the German Consumer Price Index, Japan’s National Consumer Price Index and the Euro-Zone Consumer Price Index Estimate are released in the final two days of the week.

Fore more market moving events visit the MarketPulse Economic Calendar

WEEK AHEAD

* USD Durable Goods Orders

* USD Consumer Confidence

* USD Federal Open Market Committee Rate Decision

* NZD Reserve Bank of New Zealand Rate Decision

* EUR German Unemployment Rate

* USD Gross Domestic Product

* EUR German Consumer Price Index

* JPY National Consumer Price Index

* EUR Euro-Zone Consumer Price Index Estimate

* CAD Gross Domestic Product

* CNY Manufacturing PMI

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Week in FX Europe – German Growth Concerns Rise As European Engine Stalls

• German ZEW Drops into Negative Territory


• UK Inflation drops to 1.5%


• BoE Chief Economist gloomier about UK Economy

Germany’s ZEW Institute released its monthly survey falling into negative territory. The financial analysts who participate are not optimistic and could hint an upcoming contraction in the third quarter. The EUR/USD was trading below 1.27 and expected to head lower awaiting US retail sales. What happened next could very well define what colour ink do investors use to describe 2014. A weaker than expected US retail sales figures spooked investors into a sell off that saw the EUR/USD pair break above 1.28 as safe haven flows took over and European bond yields went their own way. German bunds were favoured, but Spanish, Italian and Greek debt came very close to crisis levels.

It took strong corporate earnings and strong US employment and housing data to reverse the trend before the end of the week. Questions remain about how deep is the economic malaise in Germany. There is no denying that the economic fundamentals of the nation are strong, but as it faces a stand off with the rest of Europe over austerity, it is hard to see how Europe as a whole can break away from stagnation.

The Bank of England was proving the be the only central bank that could be counted along with the US Federal Reserve for a possible rate hike in 2014. Now that seems to be out of the table as global economic conditions have worsened and growth forecasts cut. The UK inflation fell to 1.2%, a five year low, making very unlikely that the BOE will raise rates this year. To make the matter more clear the Bank’s Chief Economist is saying he has changed his mind on when to hike. He described a “gloomier” outlook on the economy given the latest inflation figures. A Reuters poll still finds high probability of a first quarter hike next year amongst analysts.

Next week in Europe

The drop in US retail sales along other geopolitical events trigged a wave of uncertainty across the globe. Stock markets and emerging market currencies were the biggest losers as the US economy was thought to be slowing down. The last two days of the week calmed investor’s nerves as earning reports were solid as well as housing and employment indicators out of the US.

Next week has two major trends: Central banks and PMIs. The Reserve Bank of Australia releases its minutes on Tuesday. The Bank of England will also release the minutes from its rate setting meeting two weeks ago on Wednesday . Given that the BOE’s chief economist has cooled expectations of a rate hike this year there will be little surprise in the minutes. The Bank of Canada will announce its benchmark rate. No change is expected given the mixed economic data and employment data confusion.

The flash manufacturing purchasing manager’s index PMI is a survey of manager to gauge their optimism regarding business conditions going forward. HSBC for China and Markit for the rest of the world are the firms that have compiled the early draft of the data and will release it starting with China and the schedule will move around the world given insights into the state of the global economy.

Fore more market moving events visit the MarketPulse Economic Calendar

WEEK AHEAD

* CNY Gross Domestic Product

* AUD Consumer Prices Index

* GBP BOE Minutes

* USD Consumer Price Index

* CAD Bank of Canada Rate Decision

* CNY Flash PMI

* EUR French, Spanish, German and European Flash PMIs

* USD US Flash PMI

* NZD Consumer Prices Index

* GBP Gross Domestic Product

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ECB to Announce Plans to Revive Europe

The European Central Bank will present details on Thursday of a new asset-buying plan with which it hopes to revive the flagging euro zone economy and see off the specter of deflation.

The ECB plans to buy asset-backed securities (ABS) – packages of reparcelled loans – with a view to spurring the market for such credit and supporting lending to the small- and mid-sized firms that form the backbone of the euro zone economy.

But for the plan to apply across the bloc, the central bank may need to buy ABS paper below the standard it usually requires for collateral offered up by those tapping its funding operations.

CNBC

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Week in FX Europe – EUR Run Ragged after Consolidation

• U.S. dollar adjusts to mid-2015 rate hike


• ECB could use additional unconventional measures


• With QE on the table the EUR could hit €1.20 in six months

Diverging monetary policies have fueled the U.S. dollar’s strength this summer, more so against the EUR than any of the other Group of Seven (G-7) currencies. On Thursday, the pressure applied to the single unit managed to push it to its weakest outright level (€1.2697) in almost two years. To date, the greenback has ridden the wave of quantitative easing (QE) tapering and the prospect of a mid-2015 rate hike, and because of that, the market has been able to ride the telegraphed last five-cent EUR freefall with very little obstruction.

Are Unorthodox Monetary Measures Afoot in the Eurozone?

Over the past week, aiding the EUR’s demise was the European Central Bank (ECB) President Mario Draghi reiterating that eurozone policymakers could use additional unconventional policy measures if it felt that its inflation target was threatened. But further dollar strength will need to be derived from how the Federal Reserve manages its balance sheet, and it’s here that opinions begin to split. Currently, the Fed has all the tools it needs to raise borrowing costs when it decides the U.S. economy is strong enough to take it, and we can expect them to keep adjusting its policy as it exits the current stimulus program.

The expected breadth and depth of the EUR’s downtrend varies from dealer to dealer, ranging from €1.17 to €1.22 over the next six months, solely on expectations that the ECB will have to implement QE to bolster inflation. This week, Draghi again maintained ECB policy would remain accommodative for the foreseeable future. However, he also stressed that he did not see inflation risks in the eurozone — he sees risks to low inflation for a “long time.” Draghi’s tone has many wondering whether full-blown QE might be on the cards. The ECB has already pledged to buy some types of nongovernment bonds, and an extension into euro sovereign debt seems to be the next reasonable step.

Draghi’s German Conundrum

In reality, many questions do remain, not least around the mechanism that the ECB could use given German legal obstacles. Like most G-7 central banks, the ECB could provide unlimited amount of capital or credit, but if the fiscal and structural set up hurts rather than aids the region, what’s the point?

With risk assets in freefall yesterday across the various asset classes, there is no bigger safe haven for investors than the mighty U.S. dollar. The EUR’s big move lower has followed 10 days of consolidation, and the next target for the techies is the November 2012 low of €1.266. With the market predominately short the single unit, next week’s ECB post-rate setting press conference will set the tone for the EUR’s next directional leg.

What to Expect Next Week

Europe will kickstart next week’s trading activity with German preliminary inflation numbers. It will be an all-day event on Monday because the ‘actual’ is comprised of data from six German states, which report their consumer-price indexes throughout the day. Both China and the U.K. will deliver manufacturing purchasing managers’ indexes by midweek, just after the market gets to gauge consumer confidence in the U.S.

The ECB monetary policy meeting will dominate activity on Thursday. The rate decision is often priced in to the market, so expect it to be overshadowed by the ECB’s post-meeting press conference.

Down Under, New Zealand’s monthly ANZ Business Outlook survey will be out on Monday. It’s a leading indicator of that country’s economic health. It’s worthwhile to note the Kiwis’ business confidence numbers have been on a downward trend over the last six months. Business sentiment is usually an early signal of future economic activity such as spending, hiring, and investment. Not to be left out, the Aussie’s monthly retails sales are reported on Tuesday, a day before building approvals and trade numbers.

The granddaddy of economic releases – the U.S. nonfarm payrolls (NFP) report – will close out the week. The NFP’s importance usually makes for a hefty market impact. Also, Canada will produce its gross domestic product numbers in the first half of the week, while Canadian trade balance data will follow the U.S.’s own trade numbers release on Friday.

Economic Events

WEEK AHEAD

* EUR German Consumer-Price Index

* EUR German Unemployment Change

* EUR Eurozone Consumer-Price Index Estimate

* CAD Gross Domestic Product

* USD Consumer Confidence

* CNY Manufacturing PMI

* USD ISM Manufacturing

* EUR European Central Bank Rate Decision

* USD Change in Nonfarm Payrolls

* USD ISM Non-Manufacturing Composite

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