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More Woes Heaped on EUR Print E-mail
Daily Forex Fundamentals | Written by Forex.com | Mar 21 13 12:47 GMT

More Woes Heaped on EUR

It has been a fairly quiet morning so far. There is a slight risk off tone to the market in the London session, stocks are lower and FX is stuck in fairly tight ranges. The Kiwi dollar is still the best performer in the G10 after stellar GDP data was released for the fourth quarter. The yen has also been volatile this morning after comments from the newly enthroned governor of the BOJ. The market is also digesting a raft of European economic data.

The Eurozone falls further behind

The eagerly awaited initial reading of PMI data from the Eurozone was released earlier and it was a big disappointment. Not only did France slip further into recession territory, but German data also missed estimates. Worryingly, these surveys were carried out before the Cyprus crisis blew up, so sentiment could drain further in the weeks to come. We pointed out in our Q2 outlook that France could be a risk to watch out for. Its economy has not only slipped behind other core economies, but is looking worse than some peripheral ones. The service sector PMI fell to 41.9, from 43.7 in February, which is the lowest level since February 2009. The manufacturing sector was stable at 43.9, but this is still a very low level.

Even the heart of the core is being infected by negative sentiment. Germany, which looked like it could experience a strong rebound at the start of the year, saw its PMI readings also slide this month. The manufacturing survey fell into contraction territory at 48.9 from 50.3, while the service sector remained above 50.0, at 51.6, but dipped from 54.7 in February. We will now wait for the final readings early next month, to see if sentiment has fallen further because of on-going issues in Cyprus.

Is Cyprus still a risk for the markets?

The markets continue to be fairly sanguine on both growth and Cyprus fears. EURUSD is managing to stay above 1.2900 and the low today has been 1.2880 - a notable support zone. The market recovery earlier this week was fuelled by news that the ECB would continue to finance Cypriot banks during the negotiations. But since then, even though the rhetoric has deteriorated, culminating with the ECB saying it would stop funding the banks if a bailout deal is not reached by Monday, the euro has managed to stay afloat and defy calls for it to fall.

Why the complacency? The market still expects Russia to give Cyprus the money, or for the EU/ ECB/ IMF to cave in and hand the Cypriots a bailout even if there is no bail-in. I don't believe the market truly thinks that Cyprus' demise will cause the end of the Eurozone. The country is a special case, not least because of its links to Russia. But this is where the latent problem lies - if the EU does cut Cyprus lose, what happens to European and Russian relations? Now that the ECB has given Cyprus a deadline of Monday to come up with a plan to receive a bailout, we could be at the stage where the proverbial hits the fan sooner than the market thinks. Thus, we wouldn't be surprised to see a bout of volatility in the coming days, potentially in holiday-thinned markets as we lead up to Easter.

What does this mean for traders?

This could be the calm before the storm. Since the issues in Cyprus have surfaced, the stock markets have been more directly affected, so we could continue to see sensitivity in stock markets if risks in Cyprus increase. Interestingly, the Eurostoxx index today has seen a sharper decline in consumer goods' sectors than in the financial sector. This is most likely due to the weak PMI's. In the FX spectrum the impact has been more muted. However, we think the market is in wait and see mode, with conviction too low to push the market in one direction or the other. But, sovereign fears and threats to bank deposits combined with weak growth, including in the all-important core, makes the bull case for the euro harder to make. However, downside could be limited until the Eurozone crisis stabilises and the Fed is comfortable with withdrawing some of its enormous stimulus. If we do see a sell off below 1.2880, then 1.2695 is a major support level.

Elsewhere, the big movers today were the pound, the Aussie and the Kiwi. They were all boosted by fundamental factors: strong retail sales for GBP, strong China PMI for the Aussie and stellar GDP for the NZD. These crosses are all approaching key resistance levels, that, if crossed, would open the way for further gains. Watch out for daily closes above 1.5220 in GBPUSD, 1.0420 in AUDUSD and above 0.8305 in NZDUSD.

Watch out for the Canadian Budget from 2000 GMT tonight, and some potential volatility in CAD. In USDCAD below 1.0225 is mildly bearish. If the Budget is deemed CAD bullish then 1.0180 then 1.0165 are key support levels to keep your eye on.

USDCAD: daily - approaching a key support level at 1.0180. Momentum indicators are still to the downside.

 

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