On a quiet trading day yesterday Europe’s markets marked time after absorbing the sharper than expected deterioration in Q4 GDP seen in last week’s economic data.
There was a surprise improvement in Spanish bad loans data from 11.4% to 10.4%, however this was entirely as a result of the transfer of these so bad assets into the newly formed Spanish bad bank, Sareb. This by no means marks a turnaround, given the current state of the economy, and the ratio is more likely than not expected to increase again over the coming months as the unemployment rate rises and GDP continues to slip.
In a speech to the European parliament ECB President Mario Draghi reiterated his downbeat comments earlier this month, about the health of the European economy which also weighed a little on sentiment, while at the same time reiterating that the euro exchange rate is not a policy target and only important in the context of growth and price stability.
Even amidst those downbeat comments there was some positive news when the German Bundesbank in its monthly report for February said that Germany would return to growth in Q1 after last week’s bigger than expected drop in the Q4 GDP numbers.
These comments weren’t too much of a surprise in any case given some of the early indications seen in some of the data in this first quarter of 2013. The German PMI’s have showed signs of picking up, and in January we saw a sharp turnaround in the ZEW survey for January as it rebounded from December’s 6.9 to 31.5.
Markets appear to be pricing a further increase in February with expectations of a further gain to 35.3, which would be the highest reading since May 2010, with some concerns that an improved number could well push the euro back towards its recent highs.
The most recent minutes from the Reserve Bank of Australia appeared to dash hopes of a March rate cut with the central bank broadly happy that the most recent steps to ease monetary policy were starting to have an effect. The bank did express concern about the high level of the Australian dollar which the bank appeared to acknowledge was acting as a bit of a drag on the economy.
The January minutes from the Bank of Japan didn’t tell us anything we didn’t already know with the bank concerned about the weakness of the economy.
Reports that Japan was considering purchasing foreign bonds in order to weaken the yen were denied, while it was confirmed that nominations for the new central bank Governor would be assessed after the new Prime Ministers meeting with President Obama on February 22nd.
EURUSD – trend line support from the 16th January lows appears to be holding for now at 1.3315 on our potential head and shoulders. While below 1.3520 and the 200 week MA keeps the bias for a move lower and also keeps the bearish weekly candle scenario of two weeks ago alive.
The long term trend line support at 1.3190 from the 1.2045 lows remains the major line in the sand for this uptrend.
GBPUSD – despite a marginal new low around 1.5435, the pound continues to find an element of support. Even so the direction of travel suggests we are likely to head towards 1.5270 and the June 2012 lows. We need to see a recovery back through 1.5580 to target the 1.5700 level and to stabilise in the short term.
EURGBP – the euro continues to find support around the 0.8580 area and while this level holds the risks remain for a push back towards the highs of last week at 0.8680. We need to get back below 0.8580 to retarget a move lower towards the lows of last week at 0.8460.
USDJPY – the US dollar appears to be trading in a corridor between 92.20 and 94.20 with a break out either side likely to suggest a sharp 200 point move higher or lower.
Below 92.00 suggests a move towards the 90.30 level and 29th January lows. A move through 94.00 targets the 95.00 area and 2010 highs.