EUR – How Much will EZ Industrial Production Hurt?

The Eurozone’s industrial production report is typically not a big market mover for the euro but the currency has been trading in a tight range for the past 3 days and its inability to extend higher could make Thursday’s report more market moving than usual. Given the sharp drop in German industrial production, Eurozone industrial production will not only fall for the third month in a row but the decline could be larger than anticipated. The global economy is slowing and it is no secret that the European Central Bank is worried. Industrial production may be a minor report but it is the most significant piece of EZ data this week and it’s a leading indicator for next week’s PMIs. If industrial production weakens more than expected, we could see EUR/USD slip below 1.13 towards 1.1250. Technically, the pair’s gains have been capped by the 200-day simple moving average and the decline today paves the way for a further correction. However don’t expect a major sell-off in EUR/USD prior to Friday’s US retail sales report.
The US labor market is weakening and everyone is eager to see whether slower job growth affected spending. Investors shrugged off muted inflation numbers because the decline was widely anticipated – year over year growth slowed to 1.8% from 2%, which was in line with the consensus forecast. However a disappointing retail sales report cannot be ignored. If consumer spending rises by 0.5% or less, we will see a renewed decline in the dollar that could take USD/JPY to 108 and EUR/USD above 1.1350. With oil prices falling, wage and job growth slowing, there’s a much greater chance of a negative than a positive surprise for the dollar. The resilience of USD/JPY has been remarkable following last week economic reports and it is clear that retail sales will tip the balance for the pair.
Keep an eye on the Swiss Franc tomorrow because the Swiss National Bank has a monetary policy announcement. There’s been very little change in the SNB’s outlook over the past year – they believe that accommodative monetary policy is needed for foreseeable future. They will keep interest rates unchanged at -0.75% and suggest that further easing could be possible if the Franc resumed its rise. Earlier this month CHF hit a 2-year high versus the EUR.
Meanwhile all 3 commodity currencies traded sharply lower today and the weakest was the Australian dollar. Investors are worried that tonight’s employment report will fall short of expectations, triggering further liquidation of the currency. While the labor market has been one of the few areas of strength, the Reserve Bank made it clear that without material improvements, the RBA will need to ease again. However according to the PMIs, the pace of hiring increased last month in the manufacturing, services and construction sectors. So there’s a good chance that the labor market numbers could surprise to the upside. Even if the net change in employment is less than the previous month, an increase in full time jobs would be enough to stem the slide in A$. But if the PMIs are wrong and the jobs report falls short of expectations, even by a small amount, it could be just the excuse that AUD/USD traders need to take the currency back to 69 cents. The New Zealand dollar also declined but the sell-off was modest compared to AUD and CAD. Oil prices fell 4%, driving USD/CAD sharply higher. Stockpiles continued to rise adding to concerns that slower global growth could ease demand.