EUR Lower Ahead Of ECB, AUD At 12-week Low

It would seem the method of operation for traders overnight was to get out while the getting is good. Enthusiasm surrounding the Euro appears to have petered out; amid signs the Yen is undergoing a natural period of consolidation after such a lengthy bout of selling. Risk barometers such as U.S equities have priced sufficient ‘good new’ and we expect currencies are in a similar phase until investors see new reason to revive the longer-term trend. Nonetheless, for many, any consolidative behavior represents value and we can expect to see the level of interest increase -- particularly surrounding Euro strength and Yen weakness.

Economic data overnight showed German factory orders jumped 0.8% in December, from a 1.8% fall a month earlier. Meanwhile factory orders encompassing the whole Euro region jumped 7%, signaling the Euro region recovery is gaining momentum. News that ratings agency Fitch downgraded Netherlands outlook to negative encouraged downside across European markets, with political uncertainty in Italy also keeping markets on a negative lean.

While the Euro region economy may be showing signs of stabalising, the tail risks -- particularly surrounding the fortunes of large contributors such as Spain and Italy, and the constant threat of a meltdown in Greece -- have not fully receded. We anticipate these risks will be reiterated by ECB President Mario Draghi after the bank hands down the February policy decision this evening.

Draghi Won’t Talk Down The Euro
Much of the focus surrounding the ECB policy decision this evening will be on Draghi’s views with respect to exchange rate appreciation. Draghi has the near impossible task of expressing caution, encouraging confidence while flagging the potential risks associated with substantial currency strength. The latter is the hard part given the fear of participating in a beggar-thy-neighbor policy approach, where a central bank attempts to negatively influence a currency in an effort to encourage competitiveness. The term ‘currency wars’ has entered the vocabulary of markets one again, and Draghi won’t want to be seen participating. Since early November last year the currency has risen around 7% against the greenback and a remarkable 25% gain against the Euro, with notable gains also seen across the board. At the time of writing the Euro is buying $US1.3520 and Y126.50.

AUD Slumps To 12-week Low
Yesterdays less-than-inspiring retails sales data set the scene for further Aussie dollar weakness overnight, with price action briefly nudging the downside of 103-figure. Retails sales fell a seasonally adjusted 0.2% in December according to official ABS data yesterday, falling short of the estimated 0.3% growth. The surprise fall in retail sales adds credence to the case for the Reserve Bank to ease as early as the second quarter. As of yesterday, interbank cash rate futures implied a 55% chance the RBA will slice 25bps off the official cash rate in March.

Overall risk trends seen overnight failed to encourage a sustained period of upside for the local unit, with price action remaining in a tight 35 pip range for the session. Greenback strength was noted across the board, with exception to the Japanese Yen which outpaced all major counterparts.
Nonetheless, the Aussie dollar will get a second bite of the cherry this morning with domestic employment data on the docket at 11.30 am AEDT. This is a particularly important release for the local unit and any deviation to the downside of estimates is likely to see the Aussie enter a new phase of weakness.

Markets have priced in a moderate 6,000 new jobs in January, up from a fall of 5,500 jobs in December. Still, the official unemployment rate is expected to edge up from 5.4% to 5.5%. Another less than encouraging result should see short-term support at 102.95 U.S. cents quickly breached.