Daily Economic Commentary: Euro zone

[PipDiddy]

Ay caramba! It looks as if Greece’s debt problems are still weighing heavily in the markets, which is preventing the euro from making any significant gains. EURUSD trading stayed within a range of just over 100 pips.

German Chancellor Angela Merkel shook the markets yesterday, as she once again expressed concerns about Greece’s debt situation. As in the past, she said that Germany would not provide any aid to Greece unless they came up with a rock solid plan to solve their debt problems. This sparked speculation that Germany may not give a helping hand to Greece at all, even after Greece formally asked the EU to activate the bailout package last week!

We then saw Greek yields rise over 12% - the highest levels in 12 years! Remember, bond yields tend to rise in times of uncertainty, as investors require higher yields to compensate for the additional risk. This indicates that investors are starting to sour on Greek bonds, and there are concerns that these worries could spill over onto other European countries.

Later today at 6:00 am GMT, the Gfk German consumer confidence index will be available. The index measures consumer spending, and is expected to see a rise from March’s score of 3.2, to 3.3 this April. If this reports comes in better than expected, it may just give the euro a boost…

Or, more likely, traders will just ignore it. If you ask me, the major issue that everyone is keeping their eyes on is Greece. I’d keep an eye out for any more comments made about their debt problems, as this will not only affect traders’ mindset towards the euro, but risk sentiment as a whole.

[PipDiddy]

Drat! Strong economic figures weren't able unable to keep the euro afloat amidst fresh concerns in the Greek bailout drama. Yep, it looks like it ain't over just yet!

The euro fell to a low of 1.3212 against the greenback yesterday when the IMF announced that it might have to supply an extra 10 billion EUR to Greece. Isn't the 45 billion EUR EU-IMF bailout package enough?! Well, the IMF seems to think otherwise. According to an article published in the Financial Times, Greece might even need at least 70 billion EUR over the next three years in order to end its debt problems. And the fact that Greek bonds have been downgraded to "junk bond" status by S&P isn't gonna help them secure those funds so easily...

So much for risk aversion! As Greece's woes dominated the airwaves, the euro was unable to draw support from better than expected German GfK consumer climate results. The report showed that the reading for April climbed from 3.4 to 3.8, surpassing the consensus of 3.6. This indicates that, despite the current threats to the euro zone, consumers still have an improved outlook for the German economy.

On top of that, German import prices surged by 1.7% in March, faster than the estimated 1.2% rise. This marks the indicator's sixth month in consecutive upticks, reflecting how inflation is climbing at a healthy pace for euro zone's largest economy.

Up ahead, Germany will release its preliminary CPI reading for April today. Analysts are expecting to see a 0.1% uptick for the month, following March's 0.5% rise in price levels. If the actual figure beats the consensus, the euro could pause from its sharp drop.

No other economic reports are due from the euro zone today but stay tuned for ECB official Axel Weber's speech at 8:30 am GMT. As a member of the ECB's governing council, he is part of the central bank's elite group deciding on future monetary policy actions. His comments on the ongoing Greek bailout and his assessment of the euro zone economy could have a huge impact on the euro's price action.

Also keep an eye out for the FOMC statement later today. Upbeat remarks from Fed officials could spur a round of risk-taking and allow the euro to recover from yesterday's fall. Still, price action might be really volatile at the time of the release so y'all better stay on your toes!

[PipDiddy]

The euro managed to salvage part of its losses against the yen and greenback following a very steep decline last Monday. The EURJPY rallied back to 124.24 from 122.77. The EURUSD, however, was only able to climb to 1.3201 from 1.3177.

Germany’s preliminary CPI for the month of April unexpectedly showed that general prices have declined by 0.1% during the month. The month-over-month figure was expected to be at 0.1% following a 0.5% rise during the previous period. Despite the drop in prices, the euro still showed some support as traders covered their positions from the other day to cash in their profits.

Germany’s unemployment change in April will be due later at 7:55 am GMT. Back in March, a huge drop of 31,000 among the unemployed workers was recorded. Another 11,000 is expected this April, indicating that Germany’s labor market is already improving. A decrease in unemployment reflects positively on Germany’s economy and is usually bullish for the euro.

Later at 11:30 am GMT, ECB President Jean-Claude Trichet will also deliver a speech at the Economic Summit organized by the CESifo Group, in Munich. After last Monday’s bloodbath, it would be interesting to hear whether he would comment on Greece’s debt situation. We could see another spike in volatility if and when he does.

[PipDiddy]

Despite better-than-expected results on economic data that came out of Germany, it seems that the euro is still having difficulty in finding buyers. We saw this yesterday, when the EURUSD failed to burst through Wednesday’s highs at 1.3265.

The German unemployment change showed that the number of jobless people went down by 68,000 in March, much bigger than the 11,000 reduction initially prediction. Additionally, the 31,000 drop in unemployment in February was revised to 42,000. This gave the EUR a slight boost.

For today, watch out for euro zone’s unemployment rate report and consumer price index estimate at 9:00 am GMT. The expectation is that joblessness in euro zone remained at 10.0% in March. Meanwhile, the average price of consumer goods and services is predicted to have risen by 1.4% this month. This is still far off from the European Central Bank’s inflation target, so unless the actual figure comes in higher, speculations of a rate hike from the ECB would be minimal.

With all this Greek (and Spain and Portugal) debt drama going on, traders will remain hesitant betting on the euro, which would cap the any rally by the euro. Then again, it is the end of the month, which could mean that short euro investors could start taking profit on the euro’s steep decline for the last couple of weeks.

[PipDiddy]

Thanks to the news that Greece will finally accept the financial bailout from European Union and the International Monetary Fund, the EURUSD was able post some gains for the third day in a row last Friday.

The bailout package, which amounts to 135 billion EUR, is designed to bring Greece’s huge budget deficit back below the limit agreed upon by EU members by 2014. According to Greek Prime Minister George Papandreou, the years ahead will tough for the Greeks because they will be required to make big sacrifices to create the breathing space the government needs to make appropriate changes. During the next three years, while the government raises taxes, salary increases and pensions in the public sector will be put on halt. Hopefully, this will help slash Greece’s deficit back down to the EU’s 3% of GDP limit come 2014.

The EURUSD was also supported by the better-than-expected result on its consumer price index estimate for April. The estimate stood at 1.5%, higher than the 1.4% forecast. Remember, is one of the primary things the European Central Bank looks at when determining interest rates. Generally, a rising inflation rate leads the central bank to raise rates, which is bullish for the domestic currency. Still, I wouldn’t read too much into the report… With all the debt drama going on in euro zone, containing inflation is probably not one of the ECB’s top concerns yet.

In any case, the only red flag on euro zone’s economic calendar this week is the ECB’s interest rate decision on Thursday. It is widely expected for the ECB to keep interest rates unchanged at 1.00% so currency traders will most likely shift their focus to the accompanying statement and press conference after.

[PipDiddy]

After tumbling down early in the Asian session, the EURUSD trading went to sleep for the rest of the day. How tight was it? Well, for about 12 hours, the pair traded within a tight range of just THIRTY pips, eventually closing the day below the 1.3200 handle.

Let me start things off with another update regarding the Greece bailout package. The big news coming out of the economic grapevine was that the ECB will accept Greek junk bonds, even as they were recently downgraded by the S&P last week. In the past, the ECB had required that in order for a euro zone participant to be eligible for any bailout package, its bonds had to have an “investment grade rating” from the rating companies… This basically means that the country’s bonds had to be of high quality and NOT junk, which is exactly what Greece’s bonds are.

So before the other credit agencies could downgrade the bonds, the ECB went ahead and agreed to give Greece the bailout package that it so desperately needed. Now that’s what I’m talking about – finally, a helping hand! Besides, did you really think that the ECB would just sit idly by and let Greece crumble to pieces? Of course not – it would undermine the rest of the euro zone and cause further panic!

In any case, the final aid package that the EU and IMF will be providing will amount to about 110 billion EUR – more than double the initial package of 45 billion EUR that was present a few weeks back. Looks like they really want to nip this one on the bud!

Looking on the economic menu for today, no top tier events but do keep an eye out for the German retail sales at 6:00 am GMT. My buddies over at Berlin have been telling me that sales haven’t picked up at all in the past month, which would be a lil’ disappointing, as sales did rise 1.1% in February.

Aside from that, no biggies coming out. I’ll keep you posted on any developments from Greece in tomorrow’s roundup.

[PipDiddy]

The euro was speeding on the highway to hell yesterday as it dropped furiously against the greenback and the yen. The EURUSD plummeted to the 1.3000 handle while the EURJPY crashed by more than a couple hundred pips.

Remember when Forex Gump mentioned in his recent post that the VIX, which is more commonly known as the fear index, spiked by around 30% last week? Hold on to your hats because this might blow you away... The VIX surged by almost 30% again yesterday! This sent stocks spiraling down as concerns about a debt contagion sparked fears of another global economic meltdown. Risk aversion came back to haunt the markets, causing higher-yielding currencies to bow down to the safe-havens.

Although the EU and the IMF already reached an agreement about the Greek bailout package, it seems that investors are still not convinced that the crisis is averted. The ECB even provided additional support, bending some of its own rules in order to ensure that Greece would be able to pull itself out of debt. But what these emergency measures failed to alleviate were the increasing speculations of a debt pandemic. Word on the street is that Spain is now asking for a 280 billion EUR bailout package to fix its own debt problems... That's twice as much as the EU-IMF bailout funds for Greece!

With no top-tier economic reports on the euro zone's agenda for today, the euro might continue to dive deeper as risk aversion could extend its stay in the markets. Keep your eyes and ears open for fresh developments in the Greek bailout mess... Mad props to our resident economic guru Forex Gump since he pointed out that other euro zone nations could be begging for bailout funds next. Check out his latest entry!

[PipDiddy]

For the third day in a row, the euro became the whipping boy of the foreign exchange market. From its Asian open price of 1.3003, the EURUSD writhed in pain as it was sold off furiously throughout the day to close the US trading session at 1.2820.

Risk aversion remained the key market theme yesterday, as investors exchanged their euro holdings for the safe haven US dollar. Debt contagion fears, as well as the violent riots ensuing in Greece, have caused the EURUSD to mark yearly lows week after week after week. Even economic data released yesterday seemed to agree. Euro zone’s retail sales report for March, which was expected to show a 0.1% rise, revealed no improvement.

Could the European Central Bank’s interest rate decision at 11:45 am GMT later put a stop to the euro’s pain?!? No change is expected on the ECB’s benchmark interest rate so traders will be looking into the press conference after. Would old man Jean-Claude Trichet say that everything is going to be alright and calm the contagion fears? Nobody really knows how these things turn out so it would be best to be prepared and keep those money management rules in check!

Oh, also keep an eye out on the German factory reports at 10:00 am GMT. It is expected to show a rise of 1.4%, but, if it comes in below forecast, we could see another round of euro selling.

[PipDiddy]

What the quiche happened yesterday!? A drop in the US equities led to a massive rally in the dollar and yen, leaving the poor euro to clean the dishes. The EURUSD dropped 300 pips in intraday trading before settling down at 1.2629. Meanwhile, the EURJPY was down almost 1000 pips before recuperating at 113.98.

Risk aversion dominated the markets yesterday, as traders once again moved away from the euro and towards the dollar and yen. Matters were made worse when we saw a spike in volatility during the US session that saw the Dow Jones drop by as much as 1000 points! That’s almost 10%! Sweet marmalade! What the heck happened?!

Apparently, some big time traders made some electronic trading errors which led to some highly illiquid markets. With no one willing to take on the buy side of trades, everything snow balled and led to a massive sell off. As you can see, market sentiment is so delicate right now that traders are reacting quickly as so much uncertainty is floating around.

Of course, all fires have to start from somewhere and the match that triggered all these flames were comments made by ECB President Jean Claude Trichet. During the ECB statement yesterday, the ECB decided to keep rates at current levels (no surprise there), but refrained from hitting the markets with any additional policy measures. Some market participants were expecting the ECB to announce that they would be buying government bonds in order to provide more liquidity to the markets as well as to downplay recent debt contagion fears.

But what did we get? Nada, zilch, nolla! In fact, Trichet said that it didn’t even come into discussion during the meeting! Hmmmm… Maybe Trichet and his band of policy makers are just waiting for more developments, especially regarding Greece’s austerity plan.

Speaking of the bailout package..

The big news to look out for today is NOT the US non-farm payrolls report (although, as my buddy Forex Gump says in his recent post, you should keep an eye out for it), but rather, the German parliament’s vote on the bailout package. I can’t really envision a scenario where they would vote against the bailout package, because doing so would just cause more instability and lead to more riots in Greece. I think German leaders understand that they need to show a united front in handling these debt problems.

Just remember that in the past, German leaders (ahem, Chancellor Angela Merkel) did not want to give Greece a helping hand. So there is the possibility that they make a complete 180 and vote against the plan. If this happens, boy, we may just see another run of risk aversion and this time it wouldn’t be because of some trading error!

[PipDiddy]

Euro bears took a break from their attacks last Friday, allowing the EURUSD to end back above the 1.2700 handle and the EURJPY to close at 116.36. After almost an entire week’s worth of losses, would the euro be able to make a comeback?

The euro rejoiced after the German parliament approved 22.4 billion EUR in loans for Greece as part of the 110 billion EUR in bailout funds from the European Union and International Monetary Fund. It looks like Big Brother Germany finally decided to stop being so hard on euro zone’s debt-ridden trouble child!

According to German Chancellor Angela Merkel, the euro zone’s future largely depends on Greece and that there was no other alternative but to offer aid. However, the German public seemed widely opposed to sharing some of Germany’s funds since they have budget problems of their own.

Yikes! Hopefully this doesn’t spark another set of riots in the euro zone… The ongoing riots in Greece are already too much for the euro to handle!

Over the weekend, EU officials agreed to join forces and do whatever it takes to ensure the stability of the euro. EU President Herman Van Rompuy, along with the European Council members, affirmed that the European Central Bank would be able to take necessary actions to do so. Aside from that, EU officials pledged to pay more attention to their public finances, saying that they will implement all measures needed to meet their fiscal targets for the year. Well, that’s comforting…

In the meantime, developments in this euro zone debt mess could determine the euro’s direction this week. But let’s not forget about the upcoming economic reports!

This week, the top three largest economies in the euro zone are set to release their first quarter GDP reports. Germany’s economic growth could stay flat once again for the first three months of 2010, after falling short of the 0.2% consensus and posting no growth during the fourth quarter of last year. Uh oh, that can’t be too good for the euro. Also, France is expected to post a 0.3% rise in GDP, half the growth seen in the previous quarter. Meanwhile, Italy could rebound from the 0.3% GDP decline in the last quarter of 2009 and post a 0.3% GDP increase this time. Overall, the euro zone is projected to enjoy a mere 0.1% uptick in GDP but weaker than expected figures could pull the euro even lower. Traders already seem to be going trigger-happy on their short euro orders and negative GDP results (gasp!) would give them more reasons to sell the euro.

A bunch of industrial production reports are also due from the euro zone this week. Today, France will release its industrial production report at 6:45 am GMT. After falling flat in February, French industrial production could post a 0.3% increase for March. On Wednesday, the euro zone will report its overall industrial production reading. For the month of March, a 1.2% growth in industrial production is expected.

Keep your eyes and ears open for news on the euro zone debt situation since these could have a huge impact on risk sentiment for the rest of the week. Will we see another round of losses and a fresh set of lows from the euro? Stay on your toes!