Manufacturing reports suggest Europe could slide into recession without the rest of the world, creating fallout for the euro.
The manufacturing data from Europe is looking pretty grim, what with disappointing reports from Italy, Germany and Switzerland. Meanwhile, reports from the U.S. and China suggest improving conditions. Greg Anderson, senior currency strategist at Citigroup, says the contrast points to tough times ahead in Europe.
"It appears that the preponderance of evidence is tilted towards a Europe-specific recession (possibly only a ‘soft patch’) at present," he wrote in a note to clients, adding that Citi's index of economic surprises is lower for Europe right now than it has been since November.
Now, the euro has held onto a trading range in the face of all kinds of disturbing news, from weak government bond auctions to political upheaval. As Anderson puts it, "normal relationships aren’t working 100% normally." And indications today from Mario Draghi, president of the European Central Bank, that another interest rate cut is not imminent should certainly help the single currency near term.
Still, the preponderance of gloomy data could tip the scales, Anderson says. "Reduction of tail risk is presumably the reason why EURUSD has outperformed the rate differential move, but continued weak euro zone economic growth numbers could cause the tail risk premium to re-emerge." In other words, investors may be unwilling to pay as much for a currency that has so much data weighing on it.
Over to you.
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