Flat Bounce Means Euro Downside Not Over

The euro barely managed to move above reaction high seen in New York yesterday near $1.3050.  There is widespread talk of large demand in front of $1.30 and the low thus far today is $1.3005.  Stops are thought to be below, so a break could see strong follow through, once though bids are absorbed. 

The German and Italian bond auctions went off without a hitch, but sentiment remains poor.   The seeming postponement of the private sector negotiations on Geek debt into the new year, Finland, where the government survived a vote of confidence today, appears to need a parliamentary approval to accept qualified majority voting for ESM issues, and IMF contribution disputes, do nothing to bolster confidence. 

Euro zone industrial output fell 0.1% in Oct after a 2% decline in Sept.  The year-over-year rare fell to 1.3% from 2.2%.  The consensus was looking for slightly better numbers, but a recession in Europe is given and the debate is over the magnitude and duration. 

While the euro is at 11-month lows against the dollar, it is at 10-month lows against sterling.    A convincing break of GBP0.8400 would target GBP0.8250 next.   UK unemployment figures were better than expected by the government's reckoning, but the ILO figures told a different story.    Over the last three months, the government reports about a 19k rise in the claimant count.  The ILO estimate is 128k. 

Meanwhile the polls show that the Tories are still in ascendancy.  The Conservatives now are polling better than Labor for the first time since the election.   The polls also suggest support for the government's austerity. 

In a strong US dollar environment, the Canadian dollar tends to outperform on the crosses.  This has been true this week as the euro's decline accelerated.   The Japanese yen is arguably still a safe haven and is the best performer thus far, essentially flat against the dollar.  Sterling is the second best performer, dropping about 0.70%,  almost half the decline of the euro, as Cameron underscored sterling's safe haven role.  Canada was third, losing about 0.8% so far. 

Typically in the strong dollar environment, Sweden and Norway tend to under perform.  This has been the case this week as they are thus far the weakest of the majors, dropping 1.65% and 1.75% respectively against the dollar.    Norway central bank will is shortly due to announce its rate decision.   Opinion is all over the board.  I lean toward a 25 bp cut, but some local banks are talking 50% and some say none. 

The dollar has been in less than a 20 tick range against the yen today.  Late today/early tomorrow in Tokyo, Japan reports the Dec Tankan survey.  It is expected to show that the diffusion index of large manufacturers sentiment has moved back into negative territory.  To the extent that there is a yen reaction, counter intuitively it may be the weaker the report the better the yen does.