There has been no shortage of volatility in the currency market over the past 12 hours. The EUR/USD fell to a fresh 22 month low of 1.2516 at the start of the European trading session but by the time North American traders walked into their offices, it was well off its lows. All European currencies have performed poorly against the greenback due to weaker economic data and while the CAD is unchanged, the AUD and NZD have stabilized. This morning's U.S. economic reports shined a brighter light on the U.S. economy. There were no major upside surprises but the modest decline in jobless claims and the rebound in durable goods orders confirm that the U.S. economy is recovering. Jobless claims dropped 2k last week to 370k from an upwardly revised 372k while the four week moving average also fell 5.5k to 370k. Durable goods orders rose 0.2 percent after falling 3.7 percent in March. On a day when we have seen sharp disappointments in EZ and U.K. data, these U.S. economic reports only make the dollar a more attractive safe haven currency. Meanwhile there was very little explanation for the EUR/USD's intraday recovery outside of short covering and the hope of support from the ECB. According to ECB member Nowotny, the ECB hasn't used up its arsenal. The lack of fundamental driver for the EUR/USD's intraday recovery is the very reason why the currency pair remains under pressure.
There are only a handful of ways for the EUR/USD to bottom - Greece backs away from its confrontation with Europe and declares definitively that they have no plans to leave the euro, the ECB provides additional stimulus, or Germany agrees to lend its credit quality to the rest of the EZ in the form of eurobonds. Unfortunately none of these possibilities have gained any traction in recent weeks and until they do, investors will continue to look to sell the EUR on rallies. Monetary support from the ECB is not out of realm of possibility now that we are seeing evidence of weaker economic activity. The EZ's composite PMI index dropped by the largest amount since June 2009 from 46.7 to 45.9 in May. Both the manufacturing and service sector experienced a deeper contraction and while Germany experienced a modest decline in manufacturing and an uptick in service sector activity, France suffered greatly. Nonetheless German businesses grew far less optimistic over the past month with the German IFO report dropping 3 points to 106.9. Looking at these numbers, the recent decline in asset prices and the intensification of Europe's sovereign debt troubles, the ECB will be under great pressure to ease monetary policy.
As expected, nothing material came from the EU Summit. This should surprise no one especially our readers since we repeatedly pointed out that this is a meeting to prepare for the formal EU Summit in late June. Everyone attending agreed that the European economic union needs to be strengthened and have charged EU President Van Rompuy with developing proposals for the next summit. Eurobonds, EIB recapitalization and deposit guarantees were all discussed. While Merkel did not slam the table and kick and scream about Eurobonds, she continues to say that it had huge difficulties. Speculation of a Grexit will continue to make the rounds as we go into the long weekend and into the week. The most important thing to remember is that while everyone would like to see Greece stay in the euro to avoid messy consequences, they are bracing for the worst.
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