Week in FX Europe Jan 1-6

It’s been a big week for the EUR with negative sentiment gathering momentum on last years currency play. The market has managed to penetrate the EUR’s 16-month low allowing technical analysts, who are ‘biting at the bit’, to produce varying degrees of new downside objectives. Investors are seeing a modest bid for European growth proxies, with the Nordic and CE3 pairs gaining despite weak German orders data. However, with growth questionable for ‘that’ region and the HUF particularly vulnerable due to tensions with IMF and ECB over the new central bank law, these currencies are expected to ‘stumble’ somewhat. It seems that the EUR is becoming more attractive as a funding currency, while the dollar is being viewed as an investment currency. Euro-yields are the FX beacon and next week’s Italian and Spanish funding requirements will provide the lead for currency direction.

Below are some other highlights of the week:

EUROPE

• EU: The Euro-zone manufacturing PMI was left unrevised at 46.9, up from 46.4 in November. Despite remaining in contraction territory, both German and French manufacturing PMI’s rose in December. Italian and Spanish data appears to have stabilized at very weak levels while the Greek PMI improved slightly.
• NOK: The PMI’s were weak in Norway but surprised to the upside in Switzerland. In Sweden the market witnessed a print of 48.9 vs. 47.6 in November.
• UK: The manufacturing PMI came in stronger than expected at 49.6, up from 47.7 in November. Despite remaining in contraction, there are tentative signs of the economy regaining some momentum into the new-year. Some of the sub-categories appear strong. New-orders were up to 49.2 from 46.3 in November and employment rising to 49.5 from 46.4. Interestingly, the new export orders component was very strong, at 53.5. A pleasant surprise was the upward pressure in output prices continued to recede, at 50.8, down from highs of 65.2 in February.
• CHF: The Swiss manufacturing PMI index jumped to 50.7, up from 44.8 in November. Digging deeper, output, backlog of orders and stocks of purchases all gained significantly and returned to levels in ‘expansion’. The employment component was up by 2.4 points to +48.2 points, however, it remains low.
• GER: unemployment fell by -22k in December and the unemployment rate slipped to +6.8% from +6.9%.
• NOK: The country’s manufacturing PMI fell to a new cycle low of 46.6 in December from 48.5 November.
• EU: Bond price action in Europe remains a likely source of concern, with Italian and Spanish 10-year yields continuing to creep higher.
• EU: Analysts note that the strong round of global PMI’s continue to support the notion that, “while global growth looks below average in Q4 2011, the probability of a recession outside Europe remains relatively small and diminishing.” The disclaimer is the rebuilding of Euro stress.
• EUR: Euro-zone services PMI was revised higher to 48.8, up from 47.5 in November and able to drag the composite PMI higher to 48.3. However, the prints remain in contraction territory.
• EUR: Spain and Italy fared differently. The services PMI improved in Spain from 36.8 to 42.1, while Italian services PMI fell to 44.5 from 45.8, with particularly negative developments in the more forward looking new business component. French services PMI was revised a touch higher to 50.3 and German a little lower to 52.4.
• EU: Euro-zone inflation moderated to +2.8% in December from +3.0% previously, in line with consensus. This bodes well to allow the ECB to continue easing.
• UK: Foreign investors bought £16.3b of gilts in November, just shy of 2008 record high. Increased foreign demand could be due to the systemic risk in the Euro area and lack of AAA reserve alternatives.
• EU: Euro-yields are becoming an FX beacon. France successfully auctioned close to EUR 8b in bonds but yields are rising in the periphery, with Italian 10-year yields back above 7%. Spain and Italy are up next week and the market is nervous. Renewed pressure on sovereign markets is undermining the hope that the ECB’s 3-year repo operations would not be sufficient to stabilize markets.
• UK: Services PMI surprised much stronger than expected, increasing to 54.0 in December from 52.1 in November. Add this to better manufacturing and construction PMI prints and bodes well for better growth momentum going into this New Year. However, manufacturing in contraction territory may justify an extension of QE in February, in line with expectations.
• EUR: German factory orders surprised much weaker than expected, dropping -4.8%, m/m vs. the consensus for -1.8%. The loss was driven by foreign orders, down -7.8%, m/m.
• EUR: EC confidence surveys were broadly in line with consensus last month. The data still point to a European economy flirting with recession and vulnerable to further hits to confidence.
• CHF: Swiss December CPI fell -0.7%, y/y, and down from -0.5% in November. Foreign goods inflation contributed strongly to this result, with foreign goods prices down -0.7%, m/m and -3.3%, y/y, suggesting lagged exchange rate effects remains. Market expects the SNB to keep the 1.20 floor unchanged well into 2012.
• SNB: Hilderbrand is still under pressure from his wife’s currency trading gains just before the floor was introduced-any possibility of resignation could see a CHF sell off.
• NOK: Norway’s manufacturing production surprised to the upside, proving somewhat more resilient than expected. Manufacturing production rose +0.2%, vs. the consensus for a -0.1% drop.
• CE3: IP surprised stronger in the CE3 economies. Hungarian industrial output increased +3.5%, y/y, in November, above expectations for +1.5%. Czech Republic; IP aggressively rallied +5.4%, y/y. With growth questionable for the region and the HUF particularly vulnerable due to tensions with IMF and ECB over the new central bank law currencies are expected to underperform.

AMERICAS Week in FX

ASIA Week in FX

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