Daily Economic Commentary: Euro zone

Trading Discussion News and Economy
83

The euro fell against the dollar last Friday as market’s appetite for risk took a pause. The EUR/USD pair closed the week at 1.4892, more than 50 pips lower from its Asian open at 1.4936.

Data that came out from euro zone failed to provide support for the pair as well. Euro zone’s trade balance, which measures the difference in value of imported and exported goods, only showed a 1.0B euro surplus for August, more than five times lower from the 5.1B euro forecast. Digging into the report reveals that the lower-than-expected figure was primarily caused by the 5.8% decline in exports.

The important report to watch out this week is the German Ifo Business Climate for October. It asks businesses on their opinion on the direction of the economy for the next six months. A reading of 92.1 is expected, slightly higher than the previous month’s 91.3. It is due on Friday, 8:00 am GMT.

Also keep an eye out for company earnings! If earnings come out higher than expected, we might see investors drive the EUR/USD pair higher on account of risk appetite.

84

After trading lower in the Asian session, an empty calendar didn’t stop the EUR from jumping higher against the USD throughout the European and US sessions. The EURUSD pair closed trading at 1.4942. Hmmm… it seems like the 1.5000 price level could be the next target in sight…

It seems that the EUR is jumping all over dollar weakness, as some analysts believe the USD will continue to suffer as the US Fed keeps rates low. If the Fed continues to have a bearish outlook on the US economy and keeps rates low, analysts believe that the long term trend will be toward dollar weakness and that investors will keep looking for higher yielding assets.

Today, we’ve got the German PPI m/m report coming out at 6:00 am GMT. The report - which measures the changes in prices of manufacturing goods - is a measure of inflation and is expected to show steady prices from the previous month. It isn’t normally a high impact report but nevertheless, keep an eye out for it.

Aside from that report, nothing else is on deck over the next couple of days for the Euro zone. I would expect that EUR trading will continue to be driven by degrees in risk sentiment. Watch out for traders gearing up for more earnings reports coming out from the US! Good luck trading!

85

The EURUSD attempted to hit the 1.5000 mark yesterday but fell short by just a few pips. Soon after, it tumbled down as German PPI came in worse than expected. Weak PPI numbers from the US triggered a run of risk aversion, which pushed the EURUSD much lower.

After previously showing signs of emerging from deflation, Germany’s PPI reading was a disappointment as it posted a 0.5% decline in September. The consensus was that producer price levels would hold steady for the month after printing a 0.5% uptick in August.

It also didn’t help that ECB President Jean Claude Trichet was once again airing out his anti-EUR comments while another ECB official called the strong EUR a “disaster”.

Later on, the US reported weaker than expected PPI and housing market data. This caused the EURUSD to dip below the 1.4900 mark to an intraday low of 1.4882.

No economic reports are on today’s agenda but watch out for changes in risk sentiment that could affect the EURUSD pair. Several earnings reports are due from the US today and these could shift the markets back to risk tolerance mode.

86

The EURUSD pair logged in another yearly high in yesterday’s price action. It went as high as 1.5047 before losing at 1.4998. Will the pair finally break above the psychological 1.5000 handle?

No economic reports were due in the euro zone yesterday. Though, the positive earnings from some US firms like Morgan Stanley and US Bancorp buoyed the markets together with the “anti-dollars” for the most part of the US session.

In the mean time, euro zone’s current account balance will be released today at 9:00 am GMT. The CA surplus of the 16 European member nations’ broad economy is seen to fall to €1.9 billion from €6.6 billion. A slide in surplus could suggest that capital inflows have slowed during that period perhaps due to the recent strength of the EUR. Such could reflect negatively on the economy and could place some downward pressure EUR at least in the short term.

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It seems that buying support remains strong in the EUR/USD as it traded in a U-shaped manner in yesterday’s trading session. The pair dipped during the afternoon Asian session but managed to fight back and end positively against the dollar once the European session rolled along.

As I mentioned yesterday, the euro’s current strength is indeed putting some downward pressures on their current account balance. The current account balance for September, which was released yesterday, went negative to negative €1.3 billion, much opposite the positive €1.9 billion forecast.

However, the Belgium NBB business climate survey improved to -14.2 from -17.8 the month prior. It Although still in the negative territory, it has consistently showed improvement in the last eight months indicating that businesses are getting less and less pessimistic about euro zone business conditions.

For today, the important reports due are the German Ifo business climate survey, euro zone services and manufacturing purchasing managers’ index (PMI) at 8:00 am GMT and the new industrial orders at 9:00 am GMT.

The German Ifo business climate survey for this month expected to print a reading of 92.1, which would be an improvement from September’s 91.3 figure. Meanwhile, the prediction euro zone services and manufacturing PMI are 51.4 and 50.2, respectively. Remember, a reading above the “line in the sand” number of 50.0 indicates that the industry is expanding. Lastly, new industrial orders in August probably increased again – this time by 1.25.

If these reports come out better-than-expected, we could see investors buy up the euro before they close shop for the weekend!

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The euro weakened versus the dollar in Friday’s trading, as the dollar benefitted from a fall in equities. The EURUSD closed just below the key threshold of 1.5000. Was this merely another round of Friday profit taking? Or could this set the tone for this week?

The EURUSD pair was unable to make any headway above 1.5000 as there wasn’t much reaction to all the data that came out on Friday. Euro zone manufacturing and services purchasing manager’s indexes both exceeded projections, with readings of 50.7 and 52.3 respectively. The indexes were expected to have readings of 50.2 and 51.4. This marked the highest level in the manufacturing PMI since February 2008.

Industrial orders also showed a nice improvement , as new orders rose by 2.0% during the month of August. It was expected that orders would only rise by 1.2% in the month.

German IFO business climate also rose to its highest level in over a year. The index had a score of 91.9, up from September’s score of 91.3. This though, was slightly less than the projected 92.0 score. It appears the government officials are being more optimistic over the economy, and are predicting economic growth of 1.2% in 2010.

Despite the rosy picture painted by the data, it seems that traders took cue from a fall in equities. In turn, risk aversion took a big swing and hit on Friday. Let’s take a look at what’s coming up and see if the euro can recover tits losses.

Later today, the GFK German consumer climate report is due at 7:00 am GMT. The report is expected to rise slightly from last month’s score of 4.3, to 4.5 for the month of October. Given that last week’s PMI reports showed increased optimism from business managers, lets see if this sentiment has carried over on to consumers.

On Wednesday, some inflation data will be available as the preliminary consumer price index report will be available. Consumer prices are projected to have risen by 0.1% in the past month. This would help quell some fears regarding inflation, as the index showed a 0.4% decline in the previous month.

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Just as the EURUSD was starting to feel at home above the 1.5000 mark, the greenback staged a strong rally which sent the EURUSD tumbling down by more than 150 pips. The German GfK consumer confidence reading, which failed to meet the consensus, was unable to provide support for the EURUSD.

German confidence fell for the first time in 14 months as the GfK consumer confidence index slid from 4.2 to 4.0. The index was expected to climb to 4.5 in October. Components of the index show that, although consumers’ overall economic outlook improved, income and spending expectations deteriorated. This implies that German consumers expect their country’s economic situation to improve but they doubt whether these improvements will trickle down to consumers.

Data on M3 money supply and private loans are on today’s docket. M3 money supply is expected to print a 2.1% year-over-year increase while private loans are projected to decline by 0.2%. The actual figures are due 9:00 am GMT but these reports are expected to have a minimal impact on EUR price action.

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The EUR, the fabled “anti-dollar,” continued to slide for the third consecutive day against… yes… the greenback in yesterday’s currency tug-of-war. After marking a fresh yearly high at 1.5063 early this week, the fiber is now down to the 1.4800 handle again.

The euro zone’s y/y M3 money supply in September slowed again to 1.8% from 2.6%. This account measures the change in the total quantity of domestic currency in circulation and deposited in banks. A growth in money supply allows for additional spending and investment which could lead to a hike in the interest rate in the longer run. The slowing figure, therefore, indicates that liquidity is tightening which could badly impact spending and investment especially now that euro zone’s CPI is way below the ECB’s 2% target.

The EUR continued to slide against the dollar following the report.

Today, Germany’s preliminary CPI will be published. Though, the time of release is tentative. Germany’s m/m headline inflation figure for the month of October is seen to be at 0.1% from the -0.4% reading during the previous month. An increase in the general prices of goods and services could give the EUR some support at least in the short term. However, we could be up for a negative surprise given the unexpected 0.5% drop in Germany’s PPI covering the same period.

91

The euro took another beating from the dollar yesterday as risk aversion continued to surge for the third day this week. The EUR/USD pair is currently trading around the 1.4700 handle and could revisit 1.4500 soon if risk aversion persists.

The German preliminary consumer price index for October that came out yesterday came in just as expected at 0.1%, which is an improvement from last reporting period’s -0.4%. Despite the improvement, inflation is still low and far from the ECB’s target.

The economic report to watch out today from euro zone is the German unemployment change report at 8:55 am GMT. The report, which measures the monthly net change in the number of people who are unemployed, is predicted to print worsen to 17,000 in September from -12,000 in August. Take note, however, that the report has been coming out consistently with better-than-expected numbers in the last six months so we could see another upside surprise l after, especially since the global economy is starting to recover.

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Buyers finally came back to play yesterday, as the risk appetite was boosted by the better than expected GDP data from the US. The EUR benefited from this, with the EURUSD pair closing at 1.4822.

Germany got some nice news yesterday, as the unemployment rate fell to 7.7% this October. This was down from the 8.0% figure in September and marked the 2nd straight month that the rate fell. As a result, there was an increase of 26,000, as opposed to the expected 17,000 job losses. The question is, is this pick up genuine, or merely a result of government stimulus?

ECB member Axel Weber said that the central bank may begin its exit strategies by scaling back on long term loans to banks. He said that with more and more signs of recovery, central banks should start thinking about withdrawal of economic stimulus. Weber also said that it was possible that withdrawal of such measures would come before any rate hikes as the ECB will be waiting for price stability (inflation) to hit their target levels before increasing interest rates.

Later today, we get more data coming out from Germany as the retail sales report will be available at 7:00 am GMT. Retail sales are expected to have increased by 0.7% in the month of September. Take note that the previous month’s figure was revised down to show a 2.4% decline.

Also, at 10:00 am GMT, the CPI y/y report and Euro zone unemployment data will be on deck. The CPI report is expected to show that inflation has slightly improved in the past month to show just a 0.1% decline in prices from a year ago. The previous month had printed that consumer prices fell by 0.3% from levels a year prior. Euro zone unemployment is expected to rise to 9.7%, but given the uptick in employment in Germany, could we be in for a nice surprise today?

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The euro moved lower vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.4705 level and was capped around the $1.4855 level. The common currency’s month-ending sell-off coincided with a sharp pullback in U.S. equities prices, evidencing a further reduction in risk appetite. Many data were released in the U.S. today. First, September personal income came in at 0.0%, down from a revised 0.1% in August, while September personal spending met expectations and fell 0.5%, down from +1.4% in August. The September PCE deflatory was off 0.5% y/y while September core personal consumption expenditures were up 0.1% m/m and 1.3% y/y. Also, the Q3 employment cost index was up 0.4% and the October Chicago Purchasing Manager index climbed to 54.2 from 46.1 in September. Finally, the final October University of Michigan consumer sentiment indicator improved to 70.6 from the prior print of 69.4. Today’s data evidence the fact that economic data in the U.S. continues to be mixed with significant month-on-month variations in many economic data series. Federal Reserve regional bank presidents are locked in a battle with congressional officials to reduce their independence. In eurozone news, European Central Bank official Weber yesterday reported the central bank may reduce its unlimited offerings of twelve-month loans in 2010. On the political front, European Union leaders are still deciding who should be the bloc’s first president with former U.K. Prime Minister Blair’s chances falling. European Commission President Barroso reported “We must continue the implementation of our stimulus measures, maintaining a strong focus on jobs. At the same time we need to prepare exit strategies in a coordinated way.” Weber will meet with new German finance minister Schaeuble next week to discuss the government’s spending plans. Weber this week called for “a quick exit from very expansive fiscal policy.” Data released in the eurozone today saw the September EMU-16 unemployment rate reach 9.7%, its highest level since January 1999. Also, French September producer price inflation was off 0.4% m/m and 7.5% y/y. Also, EMU-16 consumer prices were off 0.1% y/y in October. Euro bids are cited around the US$ 1.4445 level.

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Last Friday, the EUR tumbled by more than 150 pips against the USD when weak US consumer data paved the way for risk aversion. German consumers were having a tough time as well, as evidenced by Germany’s retail sales report, thus adding selling pressure on the EUR.

German retail sales fell by 0.5%, against the consensus of a 0.7% rise. The decline in consumer spending was probably caused by the reduction in working hours, which resulted to a 1.2% drop in average wages, leaving consumers with less money to spend. The euro zone’s worsening labor situation puts downward pressure on future consumer spending. The unemployment rate for the region stepped up from 9.6% to 9.7% in September.

Meanwhile, inflation stayed negative as the euro zone CPI printed a 0.1% decline from a year earlier. The price index has been lingering in the negative territory since June, implying that economic activity and demand for goods remain weak.

Euro zone’s economic schedule takes a break from releasing high impact reports for the first three days of this week as it gears up for the ECB’s interest rate decision. Given that the entire euro zone still has a long way to go before achieving a recovery, the central bank is expected to hold rates at 1%. However, just last week, ECB member Axel Weber mentioned that it was time for the central bank to start withdrawing stimulus for the markets. What will be the ECB’s move? We’ll find out on Thursday 12:45 pm GMT.

Also due on Thursday is the euro zone’s retail sales report. Sales at the retail level are expected to be up by 0.3% in September after sliding down by 0.2% in August. Would the recently reported 0.5% slump in retail sales of Germany, euro zone’s largest economy, cause the actual figure to post a downside surprise?

Come Friday, Germany will release data on its factory orders for September. Growth in factory orders has been very strong for the past four months as it saw a 1.4% rise in August. Factory orders are projected to be up by 1% in September and we’ll see whether the actual figure meets the consensus by 11:00 am GMT.

For today, euro zone’s final manufacturing PMI is due 9:00 am GMT. The reading is expected to stay above the 50.0 mark but if a downward revision is made, the EUR could sink. Other than that, no reports are due from the euro zone today. Watch out for economic reports from the US, such as the ISM manufacturing PMI and pending home sales, which could cause another round of risk aversion. Good luck!

95

The EUR bounced back versus the greenback yesterday after falling in an almost vertical fashion last week. The fiber marked a high of 1.4846 before closing at 1.4766. Will the EUR close positively against the USD for a second day in a row this week? The RBA’s rate hike could provide an answer to question.

No tier one economic reports were released in the euro zone yesterday. The EUR, together with the other “anti-dollars,” rallied yesterday when the overall sentiment turned positive. Both ISM manufacturing PMI and pending home sales in the US came in with stellar figures.

At 3:30 am GMT, the RBA is expected to raise its interest rate from 3.25% to 3.5%. Such move could spur buying interest not only in the AUD but also among other higher yielding assets like the EUR. Without much economic data coming out of the euro zone and the US, the positive sentiment triggered by the RBA’s rate hike (if ever they do) will likely be sustained at least today.

96

It seems EURUSD’s move last Monday was simply a pullback as it gave the chance for bears to sell the pair at a more expensive price. After topping out around the 1.4800 region in Asia, the EURUSD fell more than 150 pips before finding some buyer support. The pair closed the US session at 1.4712.

The surge in risk aversion was primarily caused by the poor earnings report from BMW and the announcement that the RBS and Lloyds would receive an additional 54 billion dollars in bailout funds. Euro zone financial officials note that banks remain in a fragile state and foresee additional losses for the next couple of months.

No economic data released yesterday but expect to see the final services PMI and the producer price index today. They are due at 9:00 am GMT and 10:00 am GMT, respectively. The final services PMI is expected to confirm the initial estimate of 52.3 while the producer price index is predicted to show that prices fell 0.3% in September.

We might see some sidewards action European session today as currency traders sit on the sidelines and wait for the FOMC’s statement at 7:15 pm GMT.

97

The euro busted out its dancing shoes and left the USD and JPY dazzled in yesterday’s party. Risk appetite was the tune that flowed through the market. This helped push the EURUSD to end the day up at 1.4867, while the EURJPY touched as high as 135.70 before closing at 134.64.

The euro benefitted from increased risk appetite, as stocks rose in Europe, while it seems that traders reacted favorably to the Fed statement yesterday. While the Fed did keep rates at current levels, they did express some optimism over the state of recovery for the US economy.

The final services PMI report released yesterday indicated further expansion in the services industry, as the index rose slightly 52.6. Also released was the producer price index, which revealed that producer prices fell by 0.4% in September. Still, it seems that the market reaction was subdued as traders were gearing up for bigger news coming out during the US session.

Today, at 10:00 am GMT, retail sales m/m data will be available. Retail sales are expected to have risen by 0.3% during the month of September. Still, I have a feeling that we won’t see much of a market reaction. How come? Well, I think all eyes will be on the ECB rate decision coming out at 12:45 pm GMT!

Traders will probably be on the lookout for any mention of exit strategies. In past weeks, ECB member Axel Weber has hinted that the ECB could possibly put an end to their unlimited loaning programs to banks. If the ECB decides to start exit strategies, could this boost the euro further? Watch out and I suggest you listen up as well!

98

The EUR was unable to establish a clear direction as it got mixed economic signals yesterday. Both the EURUSD and EURJPY fell after euro zone retail sales printed a downside surprise but recovered their losses as the ECB implied that they are set to unwind their easing strategies soon.

Euro zone retail sales failed to meet the conensus of a 0.3% increase and instead fell by 0.7% in September. This marks the indicator’s biggest monthly decline since August 2008, implying that consumer demand continues to weaken.

On a more optimistic note, ECB President Jean-Claude Trichet announced that the central bank plans to phase out its easing programs by next year. Still, the ECB kept interest rates at their record low of 0.1% as they maintained a cautious outlook for the entire euro zone economy. Also, ECB officials believe that inflation pressures in the coming months will remain weak as the economy struggles to achieve positive GDP growth.

Up ahead, France will release its government budget balance and trade balance data at 7:45 am GMT today. Both are expected to have nearly no impact on the EUR price action. A more high-impact report is Germany’s release of factory orders data at 11:00 am GMT. Factory orders in euro zone’s largest economy are projected to climb by 1.0% in September after rising by 1.4% in August.

Later on, the release of the US NFP report is expected to cause fireworks in the currency markets. Net jobs lost for October are expected to be at 173K, which would be a large improvement over September’s 263K increase in unemployment. If the actual figure does sink below 200K, it could pave the way for risk appetite and a EURUSD rally. But if you’re not prepared to handle the extra volatility brought about by this report, then you might want to just watch safely from the sidelines!

99

The EUR did not have enough gas to overtake the USD in last Friday’s currency race. The EURUSD pair closed lower at 1.4846 after trading flat for the most part of the day.

Germany’s factory orders rose by 0.9% in September. This gain, however, is below the 1.0% estimate and the 2.1% score in August. Investors sold off the EUR after seeing a less-than-stellar result. Meanwhile, both the NFP employment change and unemployment rate in the US came in with some very discouraging figures. Employment change was -190,000 in October, more than the -173,000 predicted. The jobless rate also worsened to 10.2% from 9.8%.

The USD gained against the EUR following the release.

Today (11:00 am GMT), Germany’s industrial production in September will be announced. Production in Germany is seen to rise again by 1.2% after already gaining by 1.7% in August. On November 10, France will also issue its industrial production account. Production in France is expected to gain by 0.9% after already posting a 1.8% advance in the month prior. On November 12, its euro zone’s turn to release its industrial production score. This figure is anticipated to expand as well by 0.6%. Overall, a rise in production could indicate an increase in demand. A rising demand in this point in time, of course, reflects well on the economy and generally on the EUR as well.

The German and the euro zone ZEW economic sentiment indices are also slated for release on Tuesday. The German ZEW economic sentiment index is seen to cool down to 55.2 from 56.0. Euro zone’s version of the account, however, is projected to increase to 58.9 from 56.9.

The highlight of the week, though, will be the release of the 3Q GDP of Germany on Friday. Germany’s economy is seen to have expanded by 0.8% during the third quarter to top its 0.3% gain during the 2Q. Later in the day, the euro zone’s 3Q GDP will also be published. For the first time since the start of the global recession, the euro zone is anticipated to post a positive growth for the third quarter. The economy is expected to have gained by 0.6% after contracting by 0.2% during the second quarter. The expansion in Germany’s economy and in the broader euro zone as well could boost the EUR’s valuation over the USD and the JPY.

100

Risk hungry traders muscled their way into the foreign exchange market yesterday, giving the EURUSD pair to retest the 1.5000 handle again. It seems like the EURUSD’s fall a few weeks back was simply a correction.

  Currency analysts are saying that the primary cause for the move yesterday was the G-20’s talk or rather, silence about the falling value of the dollar. They believe that the G-20’s lack of concern for the depreciating dollar gave the opportunity for investors to go ahead and carry on with their dollar selling.

  Germany’s report on [industrial production](http://www.babypips.com/forexpedia/German_Industrial_Production) also provided additional support for the euro. It showed that industrial production in September grew 2.7%, up from August’s revised up 1.8%. The forecast was only for a 1.2% gain. According to the report, manufacturers increased production to meet the overseas demand. 

The important report to watch out for today is the German ZEW survey at 10:00 am GMT. The report attempts to predict the direction of euro zone's largest economy in the next six months by using a positive/negative scale. A positive number means that investors, economists and analysts are optimistic about the economy. The consensus for this month is a reading of 55.2, slightly lower than October’s 56.0 figure. Expect to see the euro be bought up if the report comes out higher than expected.
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102

Relatively quiet Monday on the European front yesterday, as traders kept EUR pairs in check yesterday. The EURUSD bounced between a tight range of about 70 pips for most of the day. Could yesterday’s consolidation lead to a breakout today?

The EUR probably lost its cool from Monday’s trading session as the German and euro zone ZEW Economic Sentiment indexes came in worse than expected. The German edition showed that investor confidence fell more than expected this November, printing a reading of 51.1, down from October’s score of 56.0, while the euro zone version fell from 56.9 to 51.8.

The reports showed that investors felt that ending government stimulus coupled with high employment lowered growth expectations. This indicates that they probably feel that while there will be growth next year, it will rise at a steady pace.

Take note that this data was collected before the release of the G20 meeting this past weekend. Remember, G20 nations decided that they would take their time in implementing exit strategies for their economic stimulus plans. Will this alter investors’ mindset and could we see an uptick in next month’s release? Or are traders actually coming down to earth, after this very bullish run the past 6 months?

We could be in for another day of ranging today, as no economic reports will be released today. Be wary however, that ECB member Axel Weber will be delivering a speech today at 5:00 pm GMT. In the past, Mr. Weber has slipped up and dropped comments regarding monetary policy that the ECB had wished to keep under wraps. So, be on the lookout for any “mistakes” that could happen during his talk.