Euro Cracks in Early-Week Trading

The euro hovered just above 1.20 as trading wound down on Friday but it didn't take long for the level to give way in nearly 150-pip breakdown to start the week. The euro continued lower through the Eurozone crisis low to 1.1864 before bouncing. On the weekend, Fed officials continued to emphasize a positive but data-focused outlook. The latest from our Premium Insights, 1 of last week's CADJPY short at 103.30 hit its final 102.00  target, leaving the other CADJPY short in progress with +95 pips in the green.

The week began with a bullet as stops below 1.20 in the euro cascaded and dollar strength spread across the market. It wasn't confined to only the euro as cable busted down to 1.5176 before rebounding a full cent.

The commodity currencies and yen have been relatively stable against the US dollar but one spot to watch is AUD/USD as it tests the 2010 low of 0.8066. In early economic data, the Australian AiG performance of manufacturing index fell to 46.9 from 50.1 in a sign of continued pain in the Australian economy.

Large moves in such low liquidity leave us skeptical and it will be critical to see how the euro performs once trading has completely ramped up.

There was no clear catalyst for the moves. The latest Greek polls show Syriza with a 3 point lead and there is some talk of a Eurozone exit if they win but the dynamics are completely different from the 2011 crisis. Even if Greece leaves, it's unlikely Portugal or Spain will follow because they're now borrowing at such low rates.

A Fed hawk and dove each spoke on the weekend with Mester and Rosengren on the wires. Mester re-emphasized that the Fed sees low oil as a good sign and that officials believe it will contribute to growth-driven inflation after the one-time effects of lower gasoline.

Rosengren highlighted a more-cautious path and said the Fed can afford to remain patient until clear signs of inflation return.

The remainder of Asia-Pacific trading is quiet and then the focus will shift to German regional CPI data before the national numbers in early US trading. If the numbers are soft, the market will have a fresh reason to sell euros.