ECB Rate Cut May Support Euro

ECB Rate Cut May Support Euro
Hans Nilsson 2009-02-04

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* The dollar was little changed against most major currencies but rose versus the euro on Wednesday following seemingly better-than-expected US economic data. US service industries contracted at a slower pace than expected and the payrolls drop in the ADP Employer Services index was less than estimated. Risk aversion increased as US stocks were pressured by lackluster earnings and worries that the banks toxic assets situation was not improving. The Australian dollar was unable to penetrate the 0.65-area resistance.

* The EUR/USD fell on weaker-than-expected eurozone retail sales and deteriorating economic conditions in Eastern Europe. Still, the European Central Bank is expected to leave its benchmark interest rate unchanged at 2.00% on Thursday, which may delay a European economic recovery. We believe the inflation-targeting ECB should cut rates to revive the eurozone economy as inflation is currently a smaller problem than deteriorating growth. The pair has minor support in the 1.28-area and solid support in the 1.25. There is resistance in the 1.31-area. An ECB rate cut at this juncture may actually support the EUR/USD as the cut will likely improve the growth outlook.

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Financial and Economic News and Comments

US & Canada

* US service industries continued to contract in January, with the ISM US non-manufacturing index unexpectedly increasing to 42.9 from December’s 40.1, still below the 50 dividing line for contraction, data from the Institute for Supply Management showed. Most of the index’ key components increased in January. The business activity index rose to 44.2 from 38.9, the new orders index increased to 41.6 from 38.9, and the supplier deliveries index rose to 51.5 from 48.0. However, the employment index slipped to 34.4 from 34.5. The prices paid index climbed to 42.5 from 36.1.

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* US companies cut an estimated 522,000 jobs in January, less than expected, following a revised cut of 659,000 for December, the ADP Employer Services forecast.

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* The Labor Department employment report this Friday may show the US economy lost 535,000 jobs in January and the unemployment rate rose to a 16-year high of 7.5%.

* President Barack Obama, in an attempt to tighten up the rules for bailing out Wall Street, announced strict limits on executive pay for financial institutions receiving “exceptional assistance” from the US government. The government will require those financial companies to cap compensation of top executives at $500,000 a year.

Europe

* The final eurozone services PMI for January declined to 42.2 from an initial 42.5, Markit Economics reported. The composite PMI declined to 38.3 from a preliminary 38.5.

* The final German services PMI for January slipped to 45.2 from an initial 45.4, Markit Economics said.

* Eurozone retail sales were flat m/m in December after a downwardly revised 0.1% m/m decline in November, Eurostat reported. Retail sales fell a more-than-expected 1.6% y/y, the seventh straight decline, following November’s downwardly revised 2.6% y/y fall.

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* UK service industries shrank for a ninth month in January amid a deepening UK recession, with the CIPS services PMI increasing more than expected to 42.5 from December’s 40.2, still below the 50 dividing line signaling contraction, according to the Chartered Institute of Purchasing and Supply.


* The BRC UK shop price index increased 1.1% y/y in January after a 0.5% y/y increase in December, the British Retail Consortium said.

Asia-Pacific

* Australian retail sales rose a seasonally adjusted 3.8% m/m in December, more than expected and the largest rise since August 2000, following November’s 0.4% m/m increase, according to the Australian Bureau of Statistics (ABS).

* Australian home-building approvals unexpectedly declined in December for a sixth month, falling 2.9% m/m and matching the longest run of declines in more than four years, following November’s upwardly revised 10.2% m/m drop, data from the ABS showed. December home-building approvals plunged 32.9% y/y.

* China’s manufacturing contracted for a fourth month on falling exports, with the Chinese manufacturing PMI increasing to a seasonally adjusted 45.3 in January from 41.2 in December, still below the 50 dividing line for contraction, the China Federation of Logistics and Purchasing said.

FX Strategy Update

EUR/USD USD/JPY GBP/USD USD/CHF USD/CAD AUD/USD EUR/JPY
Primary Trend Negative Negative Negative Positive Positive Negative Negative
Secondary Trend Negative Neutral Negative Positive Neutral Neutral Negative
Outlook Neutral Neutral Negative Positive Neutral Neutral Neutral
Action None Sell Sell None None Buy when above 0.6600 None
Current 1.2852 89.47 1.4471 1.1580 1.2322 0.6450 114.96
Start Position N/A 89.17 1.4237 N/A N/A N/A N/A
Objective N/A N/A N/A N/A N/A N/A N/A
Stop N/A 91.30 1.4610 N/A N/A N/A N/A
Support 1.2800 88.50 1.4000 1.1000 1.1500 0.6200 114.50
1.2500 87.00 1.3500 1.0700 1.0700 0.6000 110.00
Resistance 1.3100 92.00 1.4500 1.1650 1.2800 0.6500 122.00
1.3500 94.00 1.5000 1.2000 1.3000 0.7000 130.00



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Source: Hans Nilsson

04.02.2009