Euro Retakes 1.5600 as Bargain Hunters Come in

Talking Points• Japanese Yen: remains near 102.00 as equities supportive• Euro: Back above 1.5600 as bargain hunters come in PPI hot • Pound: PMI Construction misses badly• Swiss Franc: still weak off UBS news• US Dollar: ADP on tap
A relatively quite night of trade in the FX markets as the dollar consolidated its gains of the past several days. The EURUSD bounced back above the 1.5600 level as the sharp sell off of the past several days brought out some bargain hunting euro longs. The only economic event of note – EZ PPI - printed at a bit hotter than expected 0.6% and stoked the move higher.Meanwhile, news out of the UK continues to confirm the fact that the housing sector is rapidly contracting. The steep fall off in construction PMI which came in at 47.2 versus 52.0 forecasts indicates that housing activity will decelerate sharply as the year progresses, likely causing the BoE to begin lowering rates in earnest. The one possible offset could come from the manufacturing sector which continues to perform well due to favorable EURGBP exchange rates. Still, housing is a bigger portion of the UK economy than manufacturing and further slowdown in that arena is likely to turn UK monetary policy more dovish. In contrast to last week, when the decoupling thesis was driving trade in the FX market especially after the better than forecast IFO, this week market players are casting a more skeptical eye towards the EZ. Last night’s horrid Retail Sales numbers along with the massive write-offs from European banks suggest that spillover effects are reaching the 17 member region. Whereas in the past EURUSD rallied off positive European data, this week the pair will only find strength if US data proves far worse than expected. In short, instead of being a test of relative strength, the trade in the EURUSD is quickly becoming a race to the bottomToday, the ADP data, though hardly accurate in the past, could roil the markets if the number prints materially worse than expected. As we noted before only a print of –100K or worse in the NFP is likely to re-ignite the euro rally. On the other hand a mild contraction in US labor demand has already been priced in and the greenback may actually rally back to the 1.5500 level.