The German labor market is expected to weaken further in June, with economists forecasting unemployment to increase 45K from May, and fears of a protracted downturn could weigh on the euro going forward.
[U][B]Trading the News: German Unemployment Change
[/B][/U][B]
What’s Expected
[/B]Time of release:[B] 06/30/2009 07:55 GMT, 03:55 EST
[/B]Primary Pair Impact : [B] EURUSD
[/B]Expected: 45K
Previous: 1K
[U][B]Impact the German Unemployment Change has had on EURUSD over the last 2 months[/B][/U]
[B]Period[/B]
[B]Data Released[/B]
[B]Estimate[/B]
[B]Actual[/B]
[B]Pips Change[/B]
[B](1 Hour post event )[/B]
[B]Pips Change[/B]
[B](End of Day post event)[/B]
May 2009
05/28/2009 07:55 GMT
64K
[B]1K[/B]
-23
+64
Apr 2009
04/30/2009 07:55 GMT
65K
[B]58K[/B]
-39
-144
[U]
[/U][U]May 2009 German Unemployment Change[/U]
Unemployment in Germany rose 1K to 3.46M in May, which crossed the wires much weaker than the 64K rise expected by economists, and the data encourages an improved outlook for Europe’s largest economy as businesses scale back on production and employment at a slower pace. At the same time, the jobless rate unexpectedly slipped to 8.2% from 8.3% in April after the Federal Labor Agency readjusted its methodology to exclude ‘special factors.’ However, as the government forecasts economic activity to contract at an annual rate of 6.2% this year, fears of a protracted downturn is likely to weigh on business sentiment, and firms may continue to take additional steps to lower their cost structure as they face fading demands from home and abroad. As a result, the ECB continued to hold the cash rate at the record-low, and pledged to purchase EUR 60B in covered bonds in an effort to stem the downside risks for growth and inflation.
[U]April 2009 German Unemployment Change[/U]
The German labor market weakened for the sixth consecutive month in April, with unemployment rising 58K from the previous month to 3.46M as businesses continued to scale back on production and employment in an effort to weather the worst economic downturn since World War II. At the same time, the jobless rate measured with the International Labor Organization standards rose for the fourth month in March to 7.6% from 7.4% in February, and conditions are likely to get worse as the region faces its worst economic downturn in over half a century. As a result, the European Central Bank is widely expected to ease policy further over the following week in an effort to steer the economy out of a recession however, as policymakers attempt to put a floor on the interest rate, the Governing Council may adopt unconventional tools in May to manage monetary policy as the outlook for growth and inflation falter.
[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:
[U][B]
Bullish Scenario:[/B][/U]
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.
[U][B]Bearish Scenario:[/B][/U]
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]
The German labor market is expected to weaken further in June, with economists forecasting unemployment to increase 45K from May, and fears of a protracted downturn could weigh on the euro going forward. At the same time, the rebound in business confidence paired with the rise in retail spending may lead firms to retain more of their employees as they anticipate global growth to improve throughout the year, and speculation for an economic recovery in late 2009 could push the exchange rate higher as investors anticipate the European Central Bank to tighten policy over the next 12 months. The final GDP reading showed economic activity fell 3.8% in the first quarter, driven by a record drop in business investments and exports, and the data foreshadows a deepening downturn in the region as the German central bank forecasts the growth rate to contract at an annual pace of 6.2% this year. In addition, Bundesbank President Axel Weber said that ‘the crisis is likely to put a strain on global financial markets and the real sector for some time to come,’ and expects the annual rate of unemployment to peak towards the end of 2010 into 2011 as firms continue to scale back on production and employment in an effort to reduce their cost structure. In addition, Mr. Weber went onto say that ‘the overall situation remains very fragile and vulnerable’ as the region faces its worst recession in over half a century, and concluded that the economy is still ‘far away’ from a sustainable recover. A government report showed factory orders fell at an annualized pace of 37.1% in April, which is the second-largest decline on record, with export demands falling 4.8%% during the same period, while a separate report showed industrial outputs unexpectedly declined 1.9% from March. With global commodity prices on the rise, businesses may turn increasingly pessimistic towards the economy as they face higher input costs, and calls from the Shadow European Central Bank to lower borrowing costs further could weigh on the exchange rate over the near-term as investors weigh the outlook for future policy. Nevertheless, as the Governing Council maintains a floor on the benchmark interest rate and commits EUR 60B in covered-bond purchases in an effort to steer the euro-region out of the recession, long-term expectations for higher rates could lead the single-currency higher over the near-term.
Trading the given event risk favors a bearish outlook for the euro as the labor market deteriorates however, the less-than-expected rise in job losses during the previous month has left the door open for an enhanced report. Therefore, if unemployment rises 25K or less in May, 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 reasonable distance taking volatility into account), and this risk will determine our first target. Our second target 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, rising commodity prices paired with the downturn in global trade may lead firms to take additional steps to lower their costs, and fears of protracted recession is likely to weigh on the exchange rate as the Bundesbank forecasts economic activity to remain subdued throughout the year. As a result, an in-line print or a rise above 45K in unemployment will 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
