Morning Commentary: The Amazing Euro

Foreign Exchange - Morning Commentary

The Amazing Euro

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Economic data continues to reveal that the eurozone is the weakest link in the global economy. Much of the eurozone is highly dependent on global trade and exports are a key component of their economies. Exports comprise nearly 50% of the German economy. But, the current environment is taking a toll on the eurozone as weak Chinese demand for their products, combined with an overall slowing global economy, is causing their manufacturing base to continue to shrink.
Today’s flash PMI readings for February revealed that EZ manufacturing PMI fell below the key threshold of 50 to 49.2 implying a continuous contracting manufacturing base. Germany is the locomotive for the EZ and German manufacturing PMI dropped sharply to 47.6 from 49.7 in January. Fortunately, the service sector component of the PMI continued to remain firm causing the overall composite PMI to rise to 51.4 from 51.0 in January.
Overlaid on top of the continuing concerns about the EZ economy is the fact that short term interest rates in Europe remain in negative territory leaving the central banks with little room for further economic stimulation. Even longer term interest rates are barely above zero with German 10-year yields at 0.14% compared to the U.S. 10-year at 2.68%.  European politics remain largely dysfunctional with key member countries like Spain and Italy going through a regular revolving door of political change adding to the angst and concern about the future.
Despite all these negatives, the value of the euro has remained steady and range bound since November. A shift in U.S. Federal Reserve policy has helped change the market dynamics and has helped to stabilize the euro.  The euro was trading near $1.2400 one year ago and the markets seem to have priced in most of the negative economic and political news we have just recapped. Market positioning remains light and we anticipate more of the same in the short term as the euro remains trapped within narrow ranges with little to cause a breakout at this time.
  • The Aussie dollar is the weakest major currency today despite a good Aussie jobs report on the back of news stories that the Chinese port of Dalian has banned coal imports from Australia. The move appears to be tied to Australia following the U.S. lead in banning Huawei from Australia’s 5G network for security reasons.
  • U.S. Durable Goods orders for December rose by 1.2% which was weaker than expected. Non-defense capital goods orders fell by 0.7% which is the fourth decline in five months suggesting a loss of momentum amid uncertainty over the trade wars.
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