Euro May Fall as Deepening Recession Drives ECB Easing Bets

The Euro may fall as the pace of economic contraction accelerates in the fourth quarter, driving expectations for ECB stimulus and eroding yield-based support.

Talking Points

Euro May Fall as Eurozone Recession Deepens in 4Q, Driving ECB Stimulus Bets
NZ Dollar Outperformed in Asia as Strong Data Birthed RBNZ Rate Hike Outlook

The roundup of preliminary fourth-quarter Eurozone GDP figures headlines the economic calendar in European hours. The regional composite reading is expected to show deepening malaise, with output down 0.4 percent in the three months through December 2012 compared with a 0.1 percent drop in the third quarter. Meanwhile, early repayments of 3-year LTRO funds have acted as de-facto tightening of monetary policy, shrinking the ECB balance sheet the smallest in a year.

Against this backdrop, deepening recession may drive bets on an offsetting round of monetary easing as slowing activity weighs on price growth and amplifies deflation risk. Such an outcome is likely to erode yield-linked support for the Euro and put downward pressure on the single currency. Needless to say, an upside surprise on the GDP front stands to produce the opposite effect.

The New Zealand Dollar outperformed in overnight trade, adding as much as 0.5 percent on average against its leading counterparts on the back of a supportive set of economic data releases. The Business NZ PMI gauge jumped to 55.2, showing manufacturing sector activity expanded at the fastest pace in eight months in January. Separately, the ANZ Consumer Confidence index rose 2.3 percent to hit the highest level since June 2010. Traders are now pricing in a 25bps RBNZ interest rate hike this year, marking the first time expectations have pointed toward tightening since April of last year (according to data from Credit Suisse).

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