If everything did not go the euro's way this week enough did to push it briefly over 1.2600 against the dollar, a level not seen in over a month.
On the continent the European debt crisis took a breather. Spain raised funds without issue and Germany moved ahead with stress tests for its banks. In the US statistics were uniformly poor. An oversold euro recovered its footing on Thursday gaining 2.8% on the day as traders cut short positions ahead of the US payroll numbers and a long American holiday weekend.
On Wednesday 171 European banks drew €131.9 billion in three month loans from the ECB. This was about half of what had been expected and helped to alleviate fears for the immediate health and safety of the European banking system. European banks have been struggling with large amounts of sovereign debt on their balance sheets. Although Thursday's ECB subscription of six-day money saw 78 banks borrow €111.2 billion, somewhat more than expected, and served to diminish optimism that the banking system will be able to continue without large injections of capital, on the whole it was a good week on the European sovereign debt front. It is very much a case of no news is good news and good news for the euro. Even the warning of Bundesbank President Axel Weber to 16 German banks that they should prepare to raise emergency capital if they fail stress tests did not dent the gathering calm.
Spain sold €3.5 billion of 5-year bonds on Thursday at a 1.7 times bid to cover ratio with an average yield of 3.657%. Both the cover and yield were worse than at similar auction in May which featured 2.35 bid to cover and 3.532%. Although Moody's had placed Spain's Aaa sovereign debt rating on review just before the sale, citing a deteriorating growth potential for the Spanish economy the sale was considered a success, particularly against the background of the Greek bailout and fears for a similar need for Spain.
Also boosting the euro was the austerity rhetoric from the European leaders at last weekend's G-20 meeting in Toronto. Currency and credit markets dislike high sovereign deficits and debt ratios and greatly fear the monetization of existing debt or its devaluation by inflation. In Canada it was the Europeans who proclaimed the virtues of austerity budgeting and their intention to restrain spending as key to both success in the credit markets and long term economic growth. It was the Americans who advocated continued high levels of deficit spending to forestall a new recession and encouraged the Europeans to do the same. Whatever the competing economic merits of the two approaches and despite the inescapable fact that European virtue was not voluntary but forced by the credit markets, debt restraint, even if it results in lower economic growth, is rewarded by the markets.
Since the advent of the European crisis in January the euro has been driven down relentlessly by fears about the sustainability of governmental deficit budgets and the long-term prospects for a debt heavy EMU and the euro. It would be odd if the market punished the united currency for its debt problems but then did not reward it for their mitigation, or at least for the preferred rhetoric from European leaders.
US statistics were poor all week. The ISM Manufacturing Survey, construction spending, pending home sales, automobile sales, factory orders, consumer confidence and personal income were all worse than predicted. Personal spending and the Case-Shiller measure of home prices were the only positive numbers. Fears over the American payrolls dominated currency and equity markets. The report from ADP Employer Services on Wednesday with only 13,000 new jobs was much weaker than expected; 60,000 had been predicted. Weekly jobless claims on Thursday at 472,000 were 17,000 higher than anticipated. The four week moving average reached 466,500, its highest since early March. Both statistics contributed to the dollar sell-off on Thursday.
In the event the NFP came in as expected. The economy lost 125,000 jobs in June, largely due to the end of temporary census employment, about even with the -130,000 prediction. Private payrolls added 83,000 workers, less than forecast and the May total was revised down by 8,000 to 33,000. The unemployment rate moved 0.2% lower to 9.5% because 650,000 fewer people were counted in the work force as they had stopped looking for jobs. Manufacturing payrolls added just 9,000 workers, less than the predicted 25,000 and that despite the continuing manufacturing recovery. Lastly, average weekly hours declined 0.1 to 34.1, another sign that employers have seen the peak in new production.
With the lack of debt crisis news from Europe, traders returned focus to the economic comparisons. In the US the recovery has begun to look fragile. The economic boost from business inventory replenishment and Federal stimulus spending has begun to wane. It has not been replaced by robust private sector expansion; there is very little job creation. Consumer spending may soon stagnate or decline if the job picture does not improve.
European economies can expect lower growth if the US goes into a substantial slowdown or recession. But the prospect for weak European economic growth has already been priced into the euro by the debt crisis. The new factor is the slipping prognosis for the US. A slowdown in the American economy had not been priced into the dollar. The reassessment began this week.
Joseph Trevisani Chief Market Analyst FX Solutions