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FXPRIMUS Market Brief of the Week: Faster Euro Zone Growth Could Delay the Action from Mario Draghi

SINGAPORE, SINGAPORE -- (Marketwired) -- 02/18/14 -- In FXPRIMUS' Market Brief of The Week for 17 February, the brokerage firm's Senior Economist, Jimmy Zhu, looks at how the Euro Zone 4Q Gross Domestic Product is influencing the market.

Economic Insights

Euro Zone 4Q Gross Domestic Product (GDP) Result Sent the Single Currency Higher

Euro Zone 4Q GDP expanded 0.3% QoQ, beating earlier estimate of 0.2%. However, the numbers are similar to our last week's forecast, or a Euro Dollar rally has been expected. The key issue here is that two of the largest economy in the currency bloc, Germany and France had faster growth than predicted earlier; with the numbers of 0.4% and 0.3% respectively. Italy, which is the third-largest economy, posted an expansion for the first time in more than two years, which scored a 0.1% expansion on quarter on quarter basis.

Germany GDP QoQ (white), France GDP QoQ (yellow) & Italy GDP QoQ (red):

Based on Euribor Market, there are decent percentages for next month's rate cut bets despite accelerated growth. All thanks to recent tepid inflation numbers. However, we still believe that the European Central Bank (ECB) could "hold on" in the coming policy meeting as overall conditions in currency bloc did not warrant further easing at this moment, unless inflation fell further by the end of the month. Inflation in the Euro Area slowed down to 0.7% last month, less than half of ECB's goal of just below 2%.

This week, Euro Zone Purchasing Managers' Index (PMI) and German ZEW survey for February will give clues on how the latest recovery pace is. Euro Zone composite PMI for February may have risen above 53% for the first time since June 2011, according to various recent indicators. The index has been above 50% thresholds since July. As for the expectations on German ZEW, we think the numbers is likely to remain flat compared to January's reading. Overall, there is little downside risk to Euro Dollar this week besides some technical consolidation, if any.

In Asia, Chinese lending numbers is surprisingly to the upside. But do not panic if you only look at aggregate figures, because new Yuan loans contributed substantially last month. China's total aggregated financing surged to a historically high level, reaching 2,580 trillion RMB. New Yuan loans surged to 1,320 trillion RMB from the 482.50 trillion RMB in December. If we do a simple calculation, social financing only increased 1.4% YoY in January to 2.6 trillion RMB. Trust loans tumbled to 49% and corporate bonds fell to 85%, overshadowing a 23% jump in new loans. Trust loans and bonds' share of social financing also dropped to 5.9% from 17.1% a year earlier. Government clampdown on shadow banking and tight liquidity may weigh on corporate funding this year. But the good news is that the shortage of liquidity in Chinese banking system does not look real. The 7-day repo rate has calmed down to the level of below 5%.

Record new credit in China in the month of January may help economy in maintaining momentum amid government efforts to rein in risky lending. Aussie continues to climb higher. The bets are increasing that the next move for the Reserve Bank of Australia (RBA) is to raise the rate, instead of cutting it. In its housing market, eight straight months of rising housing costs in Sydney have pushed the prices to a record high. Australia's weaker exchange rate will help accelerate the country's return to trend economic growth and is likely to spur inflation for a period of time, as quoted in the text of a speech last week in Sydney.

This time, the Dollar's weakening is externally driven instead of being driven domestically. Until now, the Federal Reserve (Fed) wants to continue with its tapering program until the end of the year. In this case, stronger external growth such as the Euro Zone will lower the value of the Greenback.

Top news this week

German ZEW Economic Sentiment

I expect figures to come in at 61.5%

German Manufacturing Purchasing Managers' Index (PMI)

I expect figures to come in at 56.3%

Trade Recommendation

AUDUSD - Short at 0.8990

U.S. Dow Index has climbed almost 3% in last Friday's close since the Monday low, even after we see the tepid NFP report. It looks like that the market seems to believe that the slower jobs added was mainly due to bad weather in the U.S. Given the fact that the coming FOMC meeting will be in March and Yellen is unlikely to change the U.S. economic forecast lower this week before the Congress and the Senate, little fresh triggers could push the volatilities higher substantially.

Should confidence improve in the largest economy, the USD's downside could be limited. Among the major pair, AUDUSD is moving toward its resistance level around 0.90.

We would like to short this pair if its price rebounds to 0.8990.

Entry Price - 0.8990
Stop Loss - 0.9050
1st Target Price - 0.8940
2nd Target price - 0.8900


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