Investor confidence in Germany is expected to improve in August, with economists forecasting the ZEW survey to rise to 45.0 from 39.5 in July, and the data could encourage an enhanced outlook for future growth as policymakers anticipate economic activity to stabilize throughout the second-half of the year.
[U][B]Trading the News: German ZEW Investor Confidence Survey[/B][/U]
[U][B]What’s Expected[/B][/U]
Time of release: [B]08/18/2009 09:00 GMT, 05:00 EST
[/B]Primary Pair Impact : [B]EURUSD[/B]
Expected: 45.0
Previous: 39.5
[B]Impact the German ZEW Survey report had over EURUSD for the past 2 months
[/B]
[B]July 2009 German ZEW Survey
[/B]Investor confidence in Germany unexpectedly weakened in July, with the ZEW survey falling back to 39.5 from 44.8 in June, and the data suggests market participants are projecting a slower recovery for the economy as policymakers anticipate economic activity to remain subdued throughout the first half of 2010. At the same time, a gauge of the current situation rose to -89.3 from -89.7 in June amid expectations for a rise to -87.8, and the outlook for growth and inflation remains weak as the Bundesbank forecasts GDP to contract at an annual rate of 6.2% this year. At the same time, the International Monetary Fund projects economic activity to contract 4.8% this year and 0.3% in 2010, and fears of a double-dip recession may lead policymakers to additional steps to stem the downside risks for growth and inflation as global trade conditions remain weak.
[B]June 2009 German ZEW Survey
[/B]The German ZEW investor confidence survey rose to 44.8 in June from 31.1, which is the highest reading since May 2006, and the data suggests the economic downturn may be is nearing a bottom as policymakers take unprecedented steps to shore up Europe’s largest economy. However, as the Bundesbank anticipates GDP to contract at an annual rate of 6.2% this year, fears of a stagnant recovery could drag on the economic outlook as investors weigh the prospects for future growth. Meanwhile, the European Central Bank held the benchmark interest rate at the record-low of 1.00% and pledged EUR 60B in covered bond purchases in an effort to stimulate the ailing economy, and long-term expectations for higher interest rates may continue to drive the euro higher as the Governing Council puts a floor on borrowing costs.
[B]What To Look For Before The Release[/B]
Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:
[B]Bullish Scenario[/B]:
If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on EURUSD ahead of the data release.
Bearish Scenario:
If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on EURUSD ahead of the data release.
[B]How To Trade This Event Risk [/B]
Investor confidence in Germany is expected to improve in August, with economists forecasting the ZEW survey to rise to 45.0 from 39.5 in July, and the data could encourage an enhanced outlook for future growth as policymakers anticipate economic activity to stabilize throughout the second-half of the year. The preliminary GDP reading reinforced expectations for a sustainable recovery as the growth rate unexpectedly expanded 0.3% in the second-quarter, with Europe’s largest economy emerging from the worst recession since World War II driven by a jump in public spending, and the extraordinary efforts taken on by the government may continue to support economic activity going forward as policy makers anticipate growth prospects to improve in the months ahead. Moreover, a report by the Ifo economic research group showed business sentiment in Germany improved for the fourth consecutive month in July, with the gauge for future expectations rising above 90 for the first time in over a year, and the data encourages an improved for the region as International Monetary Fund raises its outlook for global growth. However, the German central bank noted credit conditions remained far from normal, with financial institutions continuing to tighten borrowing standards for households and businesses, and the government may take additional steps to stem the downside risks for growth and inflation in an effort to support a sustainable recovery. Finance Minister Peer Steinbrueck continued to see difficulty in the commercial market, stating that “there is a possibility that the Bundesbank could give credit directly into the economy” if conditions continue to worsen however, central bank President Axel Weber countered the arguments by saying that there is ‘no need’ to reach out to individual businesses. Moreover, Mr. Weber went onto say that he has yet to see any signs of a credit crunch emerging in the economy, and projects the annual rate of growth to contract less than initially expected following the better-than-expected 2Q GDP report. As the outlook for growth improves, policy makers throughout the Euro-Zone may continue to downplay risks for the economy, and the European Central Bank may hold a neutral policy stance going into the following year as the Governing Council expects an economic recovery in 2010.
Expectations for a rise in the ZEW survey favors a bullish outlook for the single-currency, and price action following the release could set the stage for a long euro-dollar trade as the economic outlook for the Euro-Zone improves. Therefore, if the index rises to 45.0 or higher, we will look for a green, five-minute candle following the release to confirm a buy entry on two-lots of EUR/USD. Once these conditions are met, we will place our initial stop at the nearby swing low (or a reasonable distance), and this risk will establish our first target. Our second objective will be based on discretion, and we will move the stop on the second-lot to breakeven once the first trade reaches its target in order to lock-in our profits.
In contrast, the unexpected decline during the previous month has left the door open for dismal ZEW survey, and fears of a slower recovery paired with the slump in global trade may lead investors to curb their outlook for future growth as policymakers anticipate economic activity to contract at an annual pace of 6.2% this year. As a result, a drop to 35.0 or lower would favor a bearish outlook for the single-currency, and we will follow the same strategy for a short euro-dollar trade as the long position mentioned above, just in reverse.
