For yet another month the ECB sat on its hands and made no change to current policy at its April meeting. However, President Mario Draghi’s tone was noticeably more downbeat, as he said that the risks to the economic recovery, slated for the second half of this year, are to the downside. He also sounded concerned about the lack of credit for small and medium-sized businesses, particularly in the hard-hit south. However, so far the ECB’s concern is about all that these SME’s will get from the central bank, as the President also said that before new measures could be adopted they would require careful consideration.
The Eurozone crisis is turning from a sovereign crisis to an economic crisis; hence the stabilization of peripheral bond yields are not enough for the markets to remain sanguine on the currency bloc. This means that economic data is coming to the fore, and in the coming weeks and months industrial data, in particular PMI surveys, will be closely watched for further signs of deterioration. The March PMI survey data showed deterioration in the currency bloc’s economy, which dented hopes that a recovery was taking hold. Even the core economies like Germany registered declines last month. The unemployment picture was also weak, the currency bloc saw 33,000 extra unemployed persons bringing the unemployment rate to a record 12%. Although the data was weak the euro actually closed the week nearly 200 pips higher versus the dollar. This was down to a couple of factors: 1, the USD dropped sharply after extremely weak Non-Farm payrolls data for March, and 2, the spread between German and US bond yields moved in the euro’s favor after the ECB kept rates on hold and US payrolls dragged Treasuries lower, helping EURUSD to stay above 1.30.
While the fundamentals suggest the EUR should be weaker than 1.30, the EURUSD seems to be supported for as long as the ECB remains on hold. We have seen the power of central bank easing to move the FX market – look at the Fed and the recent actions of the BOJ (see the Japan section for more) – thus, if we are to see another substantial decline in EURUSD expectations need to rise that the ECB will either cut rates or adopt some form of QE in the coming months. Although we think the bar is fairly high for more easing (not even a record high unemployment rate can do it), a further deterioration in the economic outlook, particularly in the core like Germany, France and the Netherlands, could force the ECB’s hands and weaken the euro.
The week has a fairly light economic calendar for the currency bloc, however, industrial production for February and investor confidence will be watched closely. The market expects industrial production to rise by 0.2%, but for the annual rate to decline even further to -2.5%. Any data misses are likely to be met by a wave of EUR selling after its strong performance last week. 1.2850 then 1.2770 are key support levels to watch in EURUSD. Key ECB speakers next week are both German – Jorg Asmussen and Jens Weidmann - so they could dampen prospects of a near term rate cut from the ECB. On Friday 12th April the Eurozone finance ministers will meet in Dublin to discuss if Greece “deserves” its next tranche of bailout funds (EUR 2.8 billion). We have seen these funds get delayed before, thus the risk is for a positive surprise – with Greece meeting Troika conditions and receiving its next tranche of bailout funds without any complication. If this happens it could provide a temporary boost to the euro.