Euro is on the defensive this morning after major EU Q4 GDP releases show Q4 weakness even worse than feared and the strong Euro to start the year is inevitably piling on the economic pain.
Ugly growth figures for the fourth quarter out of Europe today, with Germany, France and Italy all reporting contractions in the fourth quarter. The vicious and accelerating euro rally in January (currency effects always hit with a lag) is inevitably adding to the headwinds and accelerates the time-frame to the next need for policymakers to address the weak EU economy, especially as credit has ground to a halt .
Either/or time for EUR/USD, perhaps due to EUR/JPY
Today we saw EUR/USD punching down through the key tactical support area around 1.3425 as the BoJ meeting saw no new developments and Shirakawa out saying that policies are aimed at domestic issues, etc. (this and other statements suggest that Japan will soft-pedal the JPY weakening side of things from here on out and will certainly tread more carefully on the rhetorical front - if possibly not on the policy front).
The situation is more than a bit of a farce: did we not see Japan’s Abe running around not so many weeks ago, explicitly describing what competitive devaluation is all about and aggressively proclaiming that Japan really needs a weaker currency? Now that Japan has gotten what it wants in terms of the market reaction, it will still have to carry through with significant measures in the months ahead or risk a dramatic backlash in the markets as heavy expectations are already priced in.
So now the market has a significant wait until the new BoJ leadership is decided and the end of the Japanese financial year in March. There is still a risk that this G20 meeting is an event risk that triggers a strong short term consolidation in JPY crosses if there is any significant upgrade in exchange rate rhetoric. For EUR/USD, the EUR/JPY outlook is important because the latter has been the bigger mover.
Looking ahead – next few days look like a pivot point.
Commodity currencies jumping into a rally stance this morning after the terrible EU growth figures suggests that the risks of a “melt-up scenario” are not entirely dead, but let’s see how we close the week – NZD is off to the races after a number of supportive data points (particularly last night’s PMI) and NZDUSD actually managed to touch a new high since the summer of 2011 this morning. It’s easy to write off the NZD rally as an aberration if AUDUSD remains capped below perhaps 1.0400 and USDCAD survives the 1.0000/0.9950 area. But those are important lines in the sand on the weekly close.
It is very important to watch treasury markets now that the US 10-year benchmark was back pushing at those recent highs in yields yesterday/today. IF we see yields pushing higher and the JPY pushing to new lows after a weak G20 statement, then this probably serves as a tailwind to a further melt-up in recent trends, even if they already look too long in the tooth.
Stay careful out there – volatility next week could pick up further, particularly in JPY crosses.
Economic Data Highlights
- New Zealand Jan. Business NZ PMI out at 55.2 vs.
- Japan Q4 GDP out at -0.1% QoQ vs. +0.1% expected and -1.0% in Q3
- New Zealand Feb. ANZ Consumer Confidence out at 121.0 vs. 118.3 in Jan.
- Japan BoJ left rates and asset purchase targets unchanged as expected
- France Q4 GDP out at -0.3% QoQ and -0.3% YoY vs. -0.2%/-0.2% expected, respectively and vs. 0.0% YoY in Q3
- Germany Q4 GDP out at -0.6% QoQ and +0.4% YoY vs. -0.5%/+0.5% expected, respectively and vs. +0.9% YoY in Q3
- Italy Q4 GDP out at -0.9% QoQ and -2.7% YoY vs. -0.6%/-2.2% expected, respectively and vs. -2.4% YoY in Q3
- Euro Zone Q4 GDP (1000)
- US Weekly Initial Jobless Claims (1330)
- US Weekly Bloomberg Consumer Comfort Survey (1445)
- US Fed’s Tarullo to Testify before Senate on Dodd-Frank Act (1530)
- US Fed’s Bullard to Speak (1750)
- New Zealand Q4 Retail Sales (2145)