Daily Economic Commentary: Euro zone

[ForexGump]

The EUR/USD is currently tiptoeing towards the 1.4000 mark yet again. Risk aversion has been the dominating force for last week's trading and this sentiment could be strong enough to carry on for another week. If this holds true, the EUR/USD could find itself being dragged farther and farther away from the 1.4000 level.

The EUR was able to recover some of its losses from last week as strong economic data served as rays of hope for the Euro-zone. French industrial production recorded a 2.6% uptick, against consensus of a 0.1% decrease. Manufacturing production figures from France and Italy also beat expectations. Based on these reports, the French Finance Ministry expressed its confidence that a solid base has been set for a recovery.

This week's agenda includes German ZEW economic sentiment, Euro-zone industrial production, and CPI data. Economic sentiment in Germany is projected to leap from 44.8 to 48.0 yet there is a potential downside risk, considering the recent downturn in global financial and economic sentiment. This report is due on Tuesday, along with industrial production data, which is expecting a 1.1% increase. CPI figures are on Wednesday's menu.

[ForexGump]

It was a heck of a ride for the EUR yesterday as it traversed through peaks and valleys. I’d have a heart attack if I was an unprepared intraday position player. It opened strong against the USD and the JPY until it hit a wall during the early part of the Asia session. It then went south only to reverse once again during the US session. It likewise tuned in tough versus its European counterparts until it faltered when the opening bell in Wall Street was rung.

In a speech made by ECB President Jean-Claude Trichet yesterday, he said that it may take awhile for the ECB’s monetary easing programs to render into bank lending. He reminded the banks about their responsibilities to lend to firms and other consumers. He also noted that the ECB's recently announced quantitative easing program would give a hand in untying the Euro zone’s current financial knot. So far, the ECB had only purchased about €66 million from the total €60 billion plan in covered bond purchases.

Meanwhile, Meredith Whitney, the founder of Meredith Whitney Advisory Group LLC, had recommended a buy rating for the shares of Goldman Sachs. She has not advised so since January 2008. Goldman Sachs is due to report its second-quarter earnings results tomorrow. According to her, the firm is going to post some huge revenue due to its fixed-income, currencies and commodities business. The entire US stock market, led by the financials, was buoyed by her endorsement. Risk aversion sprouted following her statement which also supported higher yielding assets such as the EUR.

Today (9:00 am GMT), both the German and the Euro zone ZEW economic sentiment survey for the month of July will be issued. Both the accounts are expected to increase (German: 44.8 to 48.0, Euro zone: 42.7 to 44.2).

Data on Euro zone’s industrial production in May will also be announced at 9:00 am GMT. The account is expected to post a 1.5% gain after falling by 1.9% in April.

Today’s positive results may give a little boost to the EUR.

[ForexGump]

While other major currencies staged a nice rally versus the USD yesterday, the EUR was weighed down heavily its poor economic data results. Even with increased risk tolerance, the EUR would probably find it hard to make significant headway above the 1.4000 mark versus the USD.

For one thing, the German ZEW economic sentiment survey for July was totally off target. It printed 39.5, which was almost ten points lower than forecast. It seems that investors and analysts have taken a step back from their previous optimistic stance and are starting to realize that their previous forecast was a bit premature. Experts say that they are expecting more disappointing ZEW survey results over the next few months. The report on euro zone industrial production also shared the same depressing tune. Apparently, industrial production for May rose only 0.5% and not 1.5% like initially expected.

For today, euro zone’s consumer price index is due 9 pm. The CPI has been steadily showing declining results month-on-month since July 2008. Contrary to consumer belief, lower prices do not necessarily point to a better economy. If the CPI starts hitting negative levels, the euro zone may enter a condition called a deflationary spiral. A deflationary spiral is a vicious cycle wherein the decrease in prices pushes production lower. This, in turn, forces businesses to lower wages and cut back on their work force. This puts less money in consumers’ pockets leading to a decline in demand for goods and services. Rinse and repeat. The consensus for the June CPI is a 0.1% decline. We’ll have to wait and see if the forecast holds!

[ForexGump]

The euro zoomed to new highs yesterday, as the EURUSD and EURJPY pairs broke past key resistance areas as risk tolerance continued to dominate the market. US earnings data has helped spark risk appetite, which has helped the euro overcome poor underlying fundamental weakness. The EURUSD and EURJPY tested highs at 1.4120 and 133.40. Are buyers done? Or will the euro continue its hot streak?

Inflation data was made available from the Euro-zone yesterday, as the CPI y/y report was released. The report showed that from a year ago, consumer prices have fallen by 0.1%. This was the first time ever that the Euro-zone has encountered negative inflation... and yet the markets didn’t reach much to it. The drop in consumer prices has been led by the steep decline in oil prices. Core CPI (which doesn’t include energy, food, tobacco and alcohol) was at 1.4%, which is still less than the 2% target of the ECB. The ECB has been expressing some fears that the Euro-zone could enter deflationary circumstances – could this recent news signal the beginning of negative inflation?

Not much high impacts news for the rest of the week, as only the French CPI m/m (6:45 am GMT today) and Euro-zone Trade Balance (9:00 am GMT Friday) are due. With not much news coming out, we may see sentiment continue to drive the market.

[ForexGump]

The EUR/USD reached the area above the 1.4100 mark and stayed there for an entire day. The EUR failed to stage a strong rally against the USD despite the rise in risk appetite yesterday. Weak fundamental data from the Euro-zone was pinpointed as the culprit.

Price levels in France failed to rise as much as expected, with CPI up by only 0.1%. This is below the forecast of a 0.3% increase. Despite this, analysts reassured that this does not necessarily imply that deflationary pressures have increased.

In another part of the Euro-zone... Trade balance data in Italy improved as it crossed over from a 0.25 billion EUR deficit to a 1.19 billion EUR surplus. This report, however, had minimal impact on the EUR, which was unable to make further headway past the 1.4100 handle.

Euro-zone trade balance data is due at 9:00 am GMT today. The region's 0.3 billion EUR deficit is expected to turn into a 1.2 billion EUR surplus. If the actual figure disappoints, we might find the EUR/USD stuck in the 1.4100 area or it could head even lower. Further increases in risk appetite, a possible result of US earnings reports, could give the EUR the boost it needs.

[ForexGump]

The EUR looked strong as it blasted its way on top of most of the other key currencies in last week’s trading. Risk tolerance continued to feed the EUR’s might for the most part of the week. Its only ‘kryptonite’ came in the form of the CAD. Trading of the EUR/CAD last week can only be described in one way… a bloody (red) long candle.

Euro zone’s trade balance for the month of May only expanded to €0.8 billion from €0.7 billion. The figure was expected to reach the €1.0 billion mark. Trade balance measures the difference between the Euro zone’s exports over its imports. A positive trade balance or a trade surplus means that the total value of exports exceeds that of its imports. Underlying the recent data was a 24% decline in exports from a year earlier. Imports, however, made a sharper drop of 27%. Both picture a weak trade environment between the Euro zone and its partners.

The German PPI in June will be released today at 6:00 am GMT. The index is projected to have increased by 0.5% during the period after registering a flat reading in May. The PPI is a good indicators of inflation since any increase in input prices are usually transferred to consumers. Note that the ECB’s inflation target is pegged just below 2%. The Euro zone’s latest CPI figure fell to an annual pace of -0.1% for the second consecutive month in a row. Hence, any increase in PPI figures would definitely be positive for the Euro zone’s economy and be bullish for the EUR at least in the short term.

[ForexGump]

The EUR starts the week on a rampage, gaining more than 140 pips against the USD in yesterday trading session. If traders’ hunger for risk continues to persist, the EURUSD pair could very well test this year’s highs.

Germany’s poor PPI released yesterday didn’t seem to faze traders at all. The consensus was a 0.5% increase but instead, the report printed that the PPI fell 0.1%. It seems that euro zone deflation fears are being continually solidified. One would think this kind of concern would weigh down heavily on the EUR but, as I mentioned, quite the opposite happened. More and more poor economic data are coming out yet the EUR continues to gain ground... It really puts that quotation amongst traders into perspective, “economists make the worst traders.”

We’ve got a clear day today as no economic data is scheduled for release. Tomorrow, expect to see the June report on consumer spending in France at 6:45 am GMT. The consensus is a 0.4% rise, up from last reporting period’s 0.2% decrease. Euro zone’s industrial new orders for May will follow at 9 am GMT. The forecast is that new orders rose by 1.9%.

[ForexGump]

With no economic reports released, euro pairs pretty much stayed in cruise control for the better part of the Asian and European sessions. However, once the US session rolled around, it appeared that risk aversion was back in the gas tank on increased fears that the CIT group would file for bankruptcy. By the end of the day, the EURUSD and EURJPY pairs were down to 1.4199 and 133.03 respectively.

Later today, a couple of reports are scheduled for release from the Eurozone. At 6:45 am GMT, the French Consumer Spending report is due. It is estimated to have risen by 0.4% from May to June. Later, at 9:00 am GMT, the industrial orders data for May is due. Expectations are that orders rose by 1.9% in the month, after it had fallen by 1.0% in the month of April.

Tomorrow, at 1:00 pm GMT, the results of the Belgium NBB Business Climate index will be released. The index is based on a survey given out to manufacturers, builders and service related companies who rate current business conditions.The index’ score is expected to improve to -21.3 from its previous reading of -23.6. 0 is the level that separates improving conditions from worsening conditions.

With all these reports expecting good figures, could these spark investors and traders to step on the gas for another rally? Or will worse than expected news dampen optimism and put the brakes on the recent push? Or will traders, as they have done so often recently, ignore bad news and find the recent retracement as an opportunity to buy up higher yielding assets once again? Let’s see how the market reacts over the next couple of days.

[ForexGump]

The EUR/USD kept its grip on the 1.4200 handle despite the reported slowdown in industrial orders. Optimistic comments from the ECB and the rise in French consumer spending helped the EUR stay resilient and hold on to its recent gains.

Industrial new orders sank by 0.2%, against the expected 1.9% increase. Orders for durable consumer goods recorded a 1.5% decline as consumers were reluctant to make purchases of bigger-ticket items. This marks the tenth consecutive month in zero to negative growth in industrial new orders.

On a brighter note, French consumer spending jumped by 1.4% after sliding down by 0.2% in the previous month. This came as a surprise because analysts were expecting a mere 0.4% uptick in consumer spending. The increase was led by a 3.5% rise in apparel purchases and a 1.3% improvement in durable goods purchases.

Keeping with the upbeat tune were ECB officials who commented that the worst is over for Italy and that economic growth would pick up pace in 2010. Would this optimistic mood for the Euro-zone hold after current account data and Belgium NBB business climate figures are released today?

The region's current deficit is projected to narrow from 5.9 billion EUR to 3.6 billion EUR. The actual figure is due at 8:00 am GMT. Meanwhile, the Belgium NBB business climate is expected to step up from -23.6 to -21.6. The reading is due at 1:00 pm GMT. If the numbers do not upset, then we may find the EUR holding on to its recent gains and even grabbing more.

[ForexGump]

The EUR continued to feed off the market participants’ risk tolerance in the capitals markets as it cruised against the JPY. It was, however, mixed against the other major league players.

The Euro zone’s current account deficit for the month of May have surpassed expectations as it narrowed to -€1.2 billion. The account was only projected to improve to -€3.6 billion from -€6.1 billion. Current account measures the difference between the total value of imported and exported goods, services, income flows, and unilateral transfers. A deficit indicates that more money is going out of the economy than coming in. While having a deficit is usually bearish for the EUR, the significant improvement in the account gave it some lift.

The EUR further gained, especially against the JPY, as risk appetite resumed in the US markets. Existing homes sales in the US for the month of June reached 4.89 million from 4.72 million. The figure was only expected to rise to 4.82 million. Market participants saw this as an additional sign that the economy is already recovering.

Data on Germany’s and the Euro zone’s flash service and manufacturing PMI’s will be published today at 8:00 am GMT. The indices are expected to show improvements.

The heavier report will come with the release of the German Ifo business climate survey. The index is expected to rise to 86.6 from 85.9.

Any improvements on the abovementioned accounts would definitely reflect positively on the Euro zone’s economy and the EUR. The EUR would also benefit from the persistence of risk tolerance in the US capitals markets.