Daily Economic Commentary: Euro zone

[PipDiddy]

The euro suffered another round of losses as concerns on Greece's debt problems resurfaced yesterday. Risk aversion came strong, pushing the euro and other major currencies lower against the dollar and yen.

The results of the German unemployment change report failed to curb the overpowering wave of risk aversion. The report printed that the change in unemployed people in December only amounted to 6,000 and not 15,000 like initially expected. Still, this was the first increase of unemployed people in seven months, pushing joblessness in Germany to a whopping 8.2%.

Shortly after, euro zone's consumer confidence survey was released. It printed -16 for December, the same reading seen the month prior. Since it was below the line in the sand figure of 0, it means that consumers remained pessimistic about the economy and their financial standing.

We've got a couple of interesting data on deck today.

First up is the euro zone's M3 money supply at 9:00 am GMT. The report measures the total change in the supply of money deposited in banks and in circulation. The expectation is a decrease of 0.6%. Remember, increasing money supply is usually seen as a sign of improving economic activity that could lead to interest rate hikes in the future. On the other hand, when money supply is falling, the pressure for central banks to raise rates lessens.

At 10:00 am GMT, expect to see the CPI flash estimate and euro zone's unemployment rate. The CPI flash estimate is predicted to show that the price level of goods and services purchased by consumers rose 1.2% this January. Meanwhile, euro zone's unemployment rate is expected to have edged up to 8.4% in December from 8.3% in November. Better-than-expected results on the reports could help keep the euro's head above the 1.3900 handle.... For today, at least.

[PipDiddy]

The euro has been getting pummeled the last two weeks as risk aversion combined with overall euro zone weakness has been over riding the markets. The EURUSD fell an additional 300 pips last week. Will euro bulls try to enter the market as we start a new month?

The major news coming out from the euro zone last Friday were employment and inflation data. Unemployment figures came in slightly better than expected, indicating that unemployment now stands at 10.0%, after last month's figure was revised down to 9.9%. It was expected that rate would hit 10.1%. Could we be seeing a peak in unemployment? Maybe, but I'm not quite ready to say that things are better yet. Remember, unemployment in the euro zone is at its highest level in over 10 years.

The euro zone CPI report indicated that inflation rose at its fastest pace in almost a year, hitting 1.0%. Still, this failed to meet expectations of a 1.2% figure. This suggests that prices wont be rising quickly and that the ECB may just keep their interest rate steady for the time being, seeing as how inflation isn't a major concern right now.

Speaking of interest rates... the ECB will be making its interest rate decision on Thursday. As I said, don't expect a rate hike anytime soon. I'm going to be on the lookout for any potential news about more unwinding of stimulus measures.

Also, take note that ECB President Jean Claude Trichet spoke on a French TV show last night, saying that a strong USD would be good for the global economy. Is this his way of talking down the euro? Remember, a weaker euro helps exports as it makes euro zone goods relatively cheaper. With that said, we could hear some comments regarding the euro's recent weakness when the ECB holds its press conference following the rate decision.

Aside from the rate decision, we've got some high key German reports this week, with retail sales due tomorrow at 7:00 am GMT and factory orders scheduled for release on Thursday.

Retail sales are estimated to have grown by 1.0% in December after falling by 1.1% in November. No big surprise here – this could have been an effect of the holiday shopping. Meanwhile, factory orders are expected to have trickled higher by just 0.2% in December. Now, if these reports come in worse than expected, we may just see the euro get its butt kicked again this week.

[PipDiddy]

Finally! The EUR ended its losing streak against the USD yesterday as it climbed to a high of 1.3940 during the US session. Euro zone's final manufacturing PMI enjoyed an upward revision, providing support for the EUR.

The final manufacturing PMI for December was revised higher from 52.0 to 52.4, indicating that the industry's expansion was stronger than previously reported. This confirms that European manufacturers are stepping up production in order to accommodate the increasing demand for exports.

Today, Germany will release its retail sales report at 7:00 am GMT. It is expected to print a 0.9% rebound from November's 1.7% plunge in retail sales. Since the retail sales report is a primary gauge of consumer spending, it could have a significant effect on EUR price action today. A better than expected figure could push the EUR higher, possibly until the 1.4000 handle. On the other hand, a weak report could force the EUR to resume its losing streak against the USD.

The euro zone is set to report its PPI at 10:00 am GMT today. Producer prices are slated to stay flat in December after posting a 0.1% uptick in the previous month.

[PipDiddy]

The euro closed mixed in yesterday’s trading. The EURUSD gained a little and rose to 1.3965 from 1.3931. The EURJPY, on the other hand, fell slightly to 126.22 from 126.29.

Germany’s December retail sales came in a tad lower than the 0.9% consensus with only a 0.8% gain. November’s figure was also revised downward to -1.7% from -1.1%. While any rebound in sales is good, the latest score was not enough to pull the whole quarter back to the positive territory. Fourth quarter retail sales were still down by 0.2%.

The result did not have much impact on the short term valuation of the EUR.

Today (10 am GMT), euro zone’s retail sales figure is on tap. Sales for the entire euro zone are expected to have increased by 0.4% in December after losing by 1.2% in November. But with the less-than-stellar German retail sales number and the downward revision in its November tally, it’s probable for the euro zone to also miss the market’s estimate. In any case, the result could just as well have a negligible impact on the euro’s short term movement unless the result-forecast discrepancy is notable.

[PipDiddy]

The euro, in just one day, managed to lose almost all of the ground it gained from the beginning of this week. The EURUSD, after hitting resistance at the 1.4000 region was quickly brought down to its knees to close the US session just a few pips under 1.3900.

Similar to Germany's retail sales report, euro zone's retail sales report yesterday failed to meet expectations. Instead of showing a growth of 0.4%, the report revealed that there was no change in sales between November and December as consumers remain insecure about their financial standing. Employment is still subdued, which is putting some downside pressure on economic activity.

For today, the important event to watch out for is the ECB's interest rate decision at 12:45 pm GMT. No rate hike or cut is expected but please do watch out for any currency talks by bank officials, especially by ECB President Jean Claude Trichet. As I've mentioned before, he has been saying how the world economy needs a strong dollar... If he comes out later with a statement something similar to that, we could see the euro break this week's low!

Before that though, expect to see the German factory orders report for the month of December. The pace of growth is predicted to have tapered down to 0.2% from 2.8% (revised up from 0.2%) in November.

[PipDiddy]

The euro got the wind knocked out of it when risk aversion came swing in full force. The EURUSD dropped by more than 150 pips from its opening price to close at a 8 month low of 1.3741.

Risk aversion was all over the markets yesterday, which saw stocks and higher yielding currencies fall flat on their face. Part of reason was the ECB rate statement, which did nothing to calm fears over the situation in certain parts of Europe. There is a lot of concern regarding Greece, Spain and now, Portugal, as investors worry that of a debt default. With all these problems plaguing the euro zone, its no surprise that the ECB kept their interest rate at 1.0% and will probably stay that way for awhile.

The only report of significance is the German industrial production report, which is expected to show that production rose by 0.6% in December. Seeing as how German factory orders failed to meet expectations and fell by 2.3% in the same month, can we expect a downward surprise?

For today, we can probably expect some light trading until the US NFP report comes out later in the day. Watch out for some volatile moves, especially if traders begin unwinding their riskier positions in light of recent events.

[PipDiddy]

Nothing could put a smile on the EUR's face last week when it suffered loss after loss against the USD and JPY. Weak economic data released last Friday contributed to further selling pressure on the EUR, causing the EURUSD to tumble to the 1.3600 handle.

German industrial production data was a huge disappointment as it printed a 2.6% decline instead of the estimated 0.6% uptick for December. This surprisingly weaker than expected figure suggests that recovery in euro zone's largest economy is losing momentum. Furthermore, economists are wary whether manufacturing activity would be able to pick up pace soon now that stimulus measures are running out.

Fortunately for the EUR, the non-farm payrolls report was unable to meet the forecast, forcing USD bulls to stop in their tracks. Still, the EURJPY continued to drop, eventually chalking up a new yearly low at 120.70.

Save for the GDP reports due Friday, euro zone's economic schedule is almost empty for this week, leaving the EUR vulnerable to the bearish outlook brought about by the usual debt woes from Greece, Portugal, and Spain.

Today, the Sentix investor confidence report is due at 9:30 am GMT. Although this report is slated to have a minimal impact on the EUR price action, a stronger than expected figure could help the EUR stay afloat. The consensus is that the indicator would climb from -3.7 to -2.3 in February, indicating that investors are becoming less pessimistic with their 6-month economic outlook for the region.

Come Tuesday, we'll see Germany's trade balance and final CPI by 7:00 am GMT. No revisions are expected for Germany's inflation indicator while its trade surplus is projected to narrow from 17.2 billion EUR to 14.6 billion EUR in December. On Wednesday, it will be France's and Italy's turn to report their industrial production figures. I hope it won't be as dismal as Germany's figures!

Lastly, on Friday, Germany, France and Italy are set to report their preliminary GDP figures for the fourth quarter of 2009. Both Germany and Italy could print slightly moderated growth figures this time after posting 0.7% and 0.6% GDP readings respectively in the third quarter. France, on the other hand, is eyeing 0.5% economic expansion in the last quarter, beating the 0.3% growth it printed before that. Could the EUR find support in upbeat GDP figures this week or would it go for another week in losses?

[PipDiddy]

The euro lagged behind the dollar and yen yet again in yesterday’s trading race. The EURUSD closed at 1.3660 from 1.3701. Similarly, the EURJPY also slipped to 121.97 from 122.50.

No top tier economic reports were due in the euro zone yesterday. Concerns regarding Greece’s soaring budget deficit, however, continued to add some selling pressure on the euro. Greek Finance Minister George Papaconstantinou stated yesterday that his government will not call for outside financial support as this alone could cause the yields on their bonds to skyrocket. At present, the government’s deficit figure remains above the EU’s 3% of GDP ceiling.

No major economic events are scheduled today in the euro zone as well. The EUR could just trade in a range bound fashion given the lack of economic flows.

[PipDiddy]

Thanks to the rumor of a €20 billion bailout plan for Greece, the euro was able to pocket some nice gains over the dollar in yesterday's trading session. The EURUSD closed the US session strongly at 1.3795, roughly 150 pips higher from its Asian session open price.

In a surprise turn of events, euro zone powerhouse Germany gave some indication yesterday that it is prepared to step in and help Greece with its debt problems. This gave risk appetite a chance to shine, helping the euro regain some of the ground it lost last week. Then again, these are all talks are yet to be confirmed, which is putting a cap on the EURUSD rally. Additionally, European Central Bank member Ewald Nowotny said that the bank has no plans of bailing out Greece, as it has never been part of the bank's charter.

For today, watch out for the French industrial production report for the month of December. The expectation is a 0.6% growth, lower than the 1.1% increase seen in November. Rising industrial production is usually considered bullish for the domestic currency as increased business activity could lead to improvements in the labor sector and employee earnings. The actual results will be released at 7:45 am GMT later.

[PipDiddy]

The euro gave back some of its winnings from the day before, as the dollar bounced back on some comments made by the Fed yesterday. The EURUSD closed lower at 1.3730 after trading as low as 1.3677.

Reports revealed that French industrial production dropped in December, as production fell 0.1% in December. The report failed to meet consensus of an increase of 0.6% although the impact of this data on the market was minimal. Seems as if traders were keeping their eyes and ears open for more news on Greece debt...

Remember, there are rumors circulating that Germany and other EU members will actually extend a helping hand to save Greece from its troubles. We can probably expect the EURUSD movement to be pretty volatile as traders decipher all the coded messages made by EU officials. In any case, we may have better indication of what their plans are for Greece when they meet today for the EU Economic Summit. If they fail to agree on a concrete plan to aid Greece, it may causes traders to sour on the euro once again.