It would be all too easy to lay blame for the overnight decline in the euro to $1.3312 against the U.S. dollar at the door of a slide in new orders for industrial goods across the Eurozone. Sure, the 34.1% plunge treats the catastrophic December drop of 23.8%, but the reality is that this data occurred in January and so some two months ago. Spot forex markets are sharper than this surely! The reality is that the need for the onset of quantitative easing by the Fed recently is slowly being seen as the necessary evil and likely to be adopted across each G10 nation. We noted at the time of the immediate aftermath that there should have been further follow-through euro buying as the view became the new anti-dollar regime. But the fact was there was none. As more up to date comment and data is digested by the market, the euro is fast losing its luster.
Confirmation this morning of a deeper recession in Britain (yes, deeper than yesterday even!) came in the shape of an upwardly revised contraction of fourth quarter GDP, which weighed in with a quarter-over-quarter decline of 1.6%. Meanwhile the Land Registry announced that regardless of whether the proverbial Englishman’s home might be his castle, it’s around 15% less expensive than one year ago. The pound lost some of its weekly gain as investors once again warmed to a dollar, which gained around 1% on a trade weighted basis this morning. The pound is lower at $1.4320 from $1.4434 Thursday.
But there were more interesting developments in Euroland beyond the industrial data. While British economic output was decaying, the French economy contracted 1.1%. Meanwhile the debate on budget spending versus quantitative easing is starting to heat up. Casting the first stone was a WSJ interview with ECB vice president, Lucas Papademos, who said that in order to support the Eurozone economy, it might now be appropriate to buy corporate bonds.
With a collective European budget deficit likely to reach 4.4% of GDP in 2009, that’s not exactly the kind of news that German finance minister, Peter Steinbrueck wanted to hear. He says that Germany has a vested interest in maintaining appropriate budget spending controls, as has each of the member nations. Breaching the Stability Pact and financial straight-jacket that limits deficit spending to 3% of GDP would therefore be a bad thing for the solidity of the Eurozone. The problem is though, that this is possibly preferable to a deepening recession. Regardless, if there was ever a time to relax the Maastricht criteria, it’s very likely right now when companies are going to the wall and unemployment is rising. This outcome was not on the menu when the chefs were cooking omelets back in the nineties.
While quantitative easing might have got off the ground in the U.K. there is no disputing that the magnitude of U.S. easing makes it the king of the patch. What is surprising though is that the market’s worst fears have so far not been played out. Failure to see an acceleration of the dollar’s initial slide, failure for currency options implied volatility to remain against the dollar and now an increased likelihood of the same medicine across the Eurozone is playing out in outright disappointment with the euro. While equities might be taking a breather today we note that euro/yen fell back beneath ¥130 today. Perhaps this is fiscal year end repatriation of corporate yen back to Japan, but it might just be the start of all around repulsion of the euro as Eurozone tensions mount.