Market News & Insights
4 December 2013

Economic Divergence Continues in Eurozone

EUR/USD 1.3578
GBP/USD 1.6356
GBP/EUR 1.2040 (0.8302)
EUR/CHF 1.2291
GBP/CHF 1.4770
GBP/AUD 1.8124

The economic calendar was on the quiet side yesterday and global equities continued this week’s negative run as risk appetite retreats ahead of key central bank meetings from the Eurozone and the UK, and perhaps the main reason is uncertainty surrounding Fridays US Non Farm payrolls. The uncertainty in equity markets however did not result in a stronger USD, once again Fed policy concerns has seen a decline in demand for USD as a safe haven and EURUSD and GBPUSD retraced all Monday’s declines to once again test its highs.

The AUD is not usually a currency we discuss on the morning commentary however recent events would indicate that we may well have further AUD declines ahead of us. The Aussie was one of the worst performers on the day yesterday following the RBA interest rate and policy announcement. Although there was no change in the rate, held at 2.5%, the tone was dovish and there has been no secret made that a weaker AUD is not seen as a bad thing for the RBA. Overnight we saw weaker than expected third quarter GDP figures with growth of .6% vs .7% expected.

We spoke about the lack of demand for USD as a safe haven amidst a global equity sell off and the movement in EURUSD would once again suggest investors are currently favouring the single currency as a reserve over traditional safe havens, JPY and USD. There are risks to the EUR but it may well be the most “stable” liquid currency this week, JPY has been consistently weak and Japanese policy suggests this is set to continue into 2014 and taper expectations are impacting USD.

Today the EUR has plenty of event risk in GDP figures and services PMI data. Services data has already been released and despite some weaker readings from the periphery, the Eurozone figure as a whole is higher than estimated posting 51.2 vs 50.9. This is just above the 50 boom/bust level and was helped dramatically by a bumper German figure posting 55.7 vs 54.5 expected. France and Italy both missed to the downside and their services industry remains in contraction. Later in the morning we have Eurozone retail sales and Q3 GDP expected to confirm .1% growth for the region, -.4% year on year.

GBP strength is hard to argue over the last 6 months and the UK economy has certainly been an outperformed vs the US and Eurozone. There is a lot of good news priced into the pound at this stage and it does leave it vulnerable to surprise weaker data. GBPEUR and GBPUSD have dropped back from recent highs. This leads us to November’s service data due out this morning, expectations are for slower growth here but we will watch the figure closely and for GBP’s reaction.

The US has plenty of data to spur taper expectations with ISM non manufacturing data, New Home sales and the ADP employment figures, the Fed’s Beige book , a survey of economic activity is due later this evening and all will shape USD and taper expectations into Fridays NFP’s.