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Ongoing Positive Eco Data Triggered Another Euro Short-Squeeze
Fixed Income: US payrolls don’t bring solace for core bonds
Strange reaction on the payrolls report as both bonds and equities rallied higher. However, the tide turned following strong ISM/Michigan consumer sentiment data. Bonds hit the skids , lost all gains and remain very close to major support. Code red alert at start of the new trading week, in which the calendar is extremely thin and devoid of market movers.
Currencies: Ongoing positive eco data triggered another euro short-squeeze
The euro was again the star performer on currency markets Friday. The EMU eco data surprised on the upside and the US eco data reinforced the global repositioning toward risky assets. The euro was captured by an impressive short-squeeze with EUR/USD and EUR/GBP jumping to now corrections highs. Is the sky the limited for the single currency?
The Sunrise Headlines
After falling for two consecutive sessions, US Equities edged up on Friday after a surprisingly strong ISM report. This morning, most Asian shares trade slightly up.
Spanish Prime Minister Rajoy tried to contain the scandal over alleged secret payments to him and other leaders of his party, promising to disclose his tax returns and financial assets this week. The opposition Socialist Party called for the resignation of Rajoy as polls showed the lowest support on record for his party.
UK Prime Minister Osborne will warn banks today that they will be broken up unless they comply fully with rules to make the financial system safer, the FT reports.
Former Italian Prime Minister Berlusconi announced on Sunday his “last great electoral and political battle” with a sweeping promise to cut taxes and the cost of government if his centre right wins the elections later this month.
Growth in China’s services sector rose for a fourth straight month in January, the National Bureau of Statistics said yesterday, although the increase was limited. The official PMI for the non-manufacturing sector rose to 56.2 from 56.1 in December.
Banks will pay back only €3.5 billion of emergency three-year loans from the ECB in a second repayment window this week.
Today, the eco calendar is very thin with only the euro zone PPI inflation data and the US factory orders.
Currencies: Ongoing Positive Eco Data Triggered Another Euro Short-Squeeze
On Friday, EUR/USD reached yet another 2 ½ year top as the news flow from Europe and the US continued to support the global repositioning trade. The EUR/USD cross rate traded even temporarily north of the 1.37 big figure.
EUR/USD had jumped to a new high north of 1.36 as the risk rally in Asia inspired across the board euro buying (including in EUR/JPY and EUR/USD). This move was extended in Europe. The final EMU manufacturing PMI surprised again on the upside. EUR/USD reached a new reaction top at 1.3675 just before the publication of the EMU unemployment data. Even this figure was better than expected (11.7% vs 11.9%), but the rally of the euro was a bit exhausted. At noon there was even a small setback as the ECB reported a lower than expected weekly repayment under the first 3-year LTRO. So, the topsides was capped ahead of the US payrolls report. The payrolls were almost perfectly in line with expectations, confirming the scenario of moderate growth. At first, there was hardly any reaction in EUR/USD. However, later in the session, EUR/USD started a real rollercoaster ride . Initially it looked as if the market was ripe for end of week profit taking even as this move was not really consistent across markets. Equities remained well supported and even core bonds were higher. So, individual markets were looking for a new equilibrium after the recent sharp moves. EUR/USD filled bids below 1.36 before the publication of the mid-morning data in the US. These data (ISM of the manufacturing sector, Michigan confidence and construction spending) all came out stronger than expected. The link between the data and the price action on global markets was not that evident. Nevertheless, EUR/USD succeeded an impressive short squeeze going into the close of the European markets. Any correction in this cross rate was clearly still considered a buying opportunity. EUR/USD reached a new correction top north of the 1.37 barrier. So, the cross rate touched two big figures in slightly more than one hour. Later in the session, EUR/USD trading entered calmer waters. The pair closed the session at 1.3640, off the intraday highs, but still with a decent gain on a daily basis (1.3579 close on Thursday). The global reallocation trade simple continues and EUR/USD doesn’t escape this global trend.
Overnight, sentiment in Asia remains constructive even as the gains on most regional equity markets are moderate. EUR/USD is slightly lower from Friday’s closing levels, but the global picture hasn’t changed. The risk-on trade remains perfectly intact.
Today, the calendar is thin. Markets will keep an eye at the Spanish January unemployment data. In the US, the factory orders are probably no important market mover. Later this week, the calendar is also only moderately interesting. Tomorrow, investors will look out whether the services PMI/ISM of the non-manufacturing sector can confirm the good news for the manufacturing measure. Afterwards, the focus of markets will turn to the EU summit and even more to the ECB press conference after the ECB policy meeting. After the recent eco data and repayment of LTRO money, there is no reason for Draghi to change his assessment from last month. So, in theory, the message from the press conference should remain euro supportive. Nevertheless, the ECB president will face quite some questions on recent market repositioning, including on the rise of the euro. He will avoid to make any detailed comments on the value of the currency. Nevertheless, markets will be very alert for any hints that the ECB would become less comfortable with the valuation of the single currency. Also interesting to see whether there are more comments from EMU politicians on the value of the currency.
With less high profile events on the calendar this week, technical considerations and investor positioning might become more important as a driver for trading on global markets and also for EUR/USD. Will ‘risk-repositioning ‘ continue at the same pace as it did in January or is there room from some consolidation? CFTC data showed a further rise in net speculative euro long positions. However, for now, there is no indication that all euro sceptics have already adapted positions to the new context. We think that this run has gone far enough, but at this stage there is no strong indication that a correction will be on the cards anytime soon. We wait for a technical sign to play the correction.
Broader context. Ongoing positive sentiment on risk continues to support the euro and the news flow from Europe (ECB talk, interest rate expectations, spread narrowing, good auctions, LTRO repayment) supports the euro, too. From a fundamental point of view, we don’t see reasons for substantial additional euro gains, as it might suffocate the already very bleak growth prospects for the euro area. However, markets are clearly not ready for a cyclical rebound of the dollar. In a short-term perspective, positive financial conditions prevail as a driver for EUR/USD trading. The repayment of ECB liquidity by the banks was an additional indicator of reduced markets stress in Europe that supported the single currency. From a technical point of view, EUR/USD regained the 1.3487 level (2012 high), improving the technical picture of EUR/USD. Next short-term target comes in at 1.3868 (Nov 2011 top).On the downside, a return in the previous 1.3.404/1.3257 previous range would be a first indication that the rally is losing momentum. A sustained drop below the 1.3000 area (1.2998 is this year’s low) would suggest that the recent rally has run its course and that more downside (or dollar strength) might be on the cards.
Support S1: 1.3581/73:STMA/Reaction low hourly. S2: 1.3542 Reaction low hourly S3: 1.3499 Break-up area S4: 1.3461/50 Reaction low hourly /MTMA
Resistance R1: 1.3683/1.3711 Daily Boll top/Reaction top R2: 1.3833/68 (62% retracement off 1.4940)/previous reaction high.
The pair is in overbought territory.
On Friday, EUR/GBP reached a new recovery high. The move was supported by a new set of positive data from Europe. Even more, late in the session, the euro was captured by another impressive short squeeze. EUR/GBP hit a new correction top north of the 0.8700 barrier.
Intra-day, the euro was very well bid across the board as a positive sentiment in Asia filtered through in the early price action in Europe. The 0.8606 correction high was again within reach and the news flow opened the way for further gains. The final EMU PMI of the manufacturing sector was materially better than the advance report. This pushed EUR/GBP for a test of the 0.8606 resistance. The UK PMI was marginally below consensus at 50. As such this report shouldn’t have been a trigger for sharp sterling losses. However, with the momentum in the euro still very strong, it was enough to trigger a next stop-loss buying move. EUR/GBP reached a new interim top at 0.8648. There was a limited setback of the euro after the ECB announcement on weekly repayment of banks on the 3-year LTRO. Even so, EUR/GBP held easily above the 0.8600 barrier. The pair entered temporary calmer waters going into the NFP release in the US and this pattern initially hardly changed after the payrolls (EUR/USD and cable both lost some ground).However, going into the close of the European markets, a new impressive euro short squeeze kicked in. At the same time, sterling extended its decline against the dollar. We didn’t see any specific trigger for both moves. However, the result was quiet impressive. EUR/GBP gained more than one big figure in less than one hour. Of late, the UK currency gradually lost some of its safe haven aureole while there was/is a global exit from safe havens at the same time. Sterling is paying a high price. EUR/GBP closed the session at 0.8692, compared to 0.8562 on Thursday evening. Was this the kind of exhaustion move that that cleared the way from some consolidation?
This morning, the euro is a few ticks lower compared to Friday’s closing levels. However, the recent highs are still within reach
Later today, the UK construction PMI will be published. A improvement from 48.7 to 49.6 is expected. The report will only be of intraday importance for sterling trading, at best. Keep a very close eye on the technical charts. Cable is retesting the recent lows in the 1.5675 area. If this levels holds, it could also slow the decline of sterling against the euro. At the same time the euro is overbought, too. Of late these considerations were not enough to cause a trend reversal. Nevertheless, the technical charts now suggest that the EUR/GBP cross rate is extremely overbought. It remains dangerous to row against the tide as long as there is no technical sign of a correction. Nevertheless, stop loss protection on EUR/GBP long exposures looks warranted.
Global context. In December, the EUR/GBP cross rate mostly copied the upward trend pattern of the headline EUR/USD pair. UK-specific eco data had only a limited impact on trading. After the January ECB meeting, the euro rallied across the board as ECB’s Draghi came out with a much more positive assessment on the EMU crisis. The chances for additional ECB easing disappeared whereas they looked real after the December meeting. This triggered a global repositioning in favour of the euro. The break above the 0.8225 range top also forced us to leave our range trading strategy in the EUR/GBP cross rate. As is the case for EUR/USD, we think the euro rally has gone far enough from a fundamental point of view. Short-term, we cannot but acknowledge the euro positive momentum. Also in this cross rate we fear some fear of heights
Support S1: 0.8615/06:STMA/Previous reaction high S2:0.8554: previous reaction low.
Resistance R1: 0.8716/32: Reaction high/Daily Boll top R2: 0.8831 Previous reaction high.
The pair is in overbought conditions
In January, US non-farm payrolls rose by 157 000, according to the official payrolls report. The outcome was very close to expectations, but the previous two monthly figures were sharply upwardly revised. The December figure was revised from 155 000 to 196 000 and the November outcome was adjusted from 161 000 to 247 000. When we take the revisions into account, the payrolls report was significantly stronger than forecast. Looking at the details, government payrolls fell by 9 000, due to layoffs within the federal (-5 000) and local (-6 000) government, while the state government added 2 000 jobs. Private sector employment increased by 166 000, marginally below the expected 168 000, but significantly down from the 202 000 seen in December. Within the private sector, employment in the goods-producing sector rose by 36 000, slightly down from the 44 000 in December. The construction sector added 28 000 jobs, while employment in the manufacturing sector increased by 4 000, half the pace seen in December. Hiring slowed from 158 000 to 130 000 in the service providing sector, due to a slowdown in employment growth in trade & transport (34 000 from 61 000), education & health (25 000 from 50 000) and leisure & hospitality (23 000 from 33 000). Hiring picked up in information (9 000 from -3 000) and business services (25 000 from 2 000), while financial sector added 6 000 jobs, slightly down from 9 000 in December. Finally, temporary help, which is often seen as a leading indicator for the overall payrolls, fell by 8 000 in January. Recently however, the correlation was rather poor. The payrolls report also included annual benchmark revisions, which added 424 000 to the total payrolls in the period from April 2011 to March 2012. Turning to the household survey, the unemployment rate picked unexpectedly up in January, rising from 7.8% to 7.9%, while a stabilization was expected. The number of people unemployed increased by 126 000 in January, to a total level of 12.332 million, but also the civilian labour force rose by 143 000 to 155.654 million. Employment increased slightly too, by 17 000 to a total of 155.654 million. Average weekly hours worked stayed unchanged at a downwardly revised 34.4, while aggregate hours worked increased by 0.1% M/M to 97.3. Average hourly earnings increased by 0.2% M/M in January, while the annual rate of growth stabilized at 2.1% Y/Y. Although the headline figure was very close to expectations, the sharp revisions of the previous month’s data are an encouraging sign. After these revisions, the payrolls show an average gain of broadly 200 000 in the fourth quarter, up from 150 000 in the third quarter. If the fourth quarter’s pattern can be sustained, it would be an encouraging sign, suggesting that the US labour market is gradually gaining strength.
Contrary to most regional business confidence indicators, the US manufacturing ISM improved significantly in January. The headline figure jumped from 50.2 to 53.1, while only a marginal increase was expected. Also the details are encouraging with new orders (53.3 from 49.7), employment (54.0 from 51.9) and production (53.6 from 52.6) gaining ground. The indicator is now at its highest level since April last year, suggesting that activity is picking up at the start of the new year, after a sluggish second half of 2012.
The euro zone unemployment rate stabilized unexpectedly in December, while the consensus was looking for a further increase. The unemployment rate stayed unchanged at a downwardly revised 11.7%, while an increase to 11.9% was expected. Eurostat estimates that both in the EU and EMU unemployment was nearly stable in December, compared with the previous month. Last month, there was already a slowdown in the layoffs. Encouraging news came from Spain, where the unemployment rate dropped from 26.2% to 26.1%, while in France (10.6% from 10.5%) and the Netherlands (5.8% from 5.6%) unemployment rates continued to increase. Although this is of course an encouraging sign from the labour market, we remain cautious as favourable weather conditions might have supported employment, so a slight uptick in the coming months is not excluded.
Written by KBC Bank
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