The euro may continue to face increased selling pressures over the week as economists forecast German unemployment to rise 64K in May, and the data could reinforce fears of a deepening downturn in the economy as businesses continue to scale back on production and investments in an effort to weather the worst recession in over half a century.
[B][U]Trading the News: German Unemployment Change[/U][/B]
[U][B]What’s Expected[/B][/U]
Time of release: 05/28/2009 07:55 GMT, 03:55 EST
Primary Pair Impact : EURUSD
Expected: 64K
Previous: 58K
[U][B]Impact the German Unemployment Change has had on EURUSD over the last 2 months[/B][/U]
<span style="">? [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]
Apr 2009
04/30/2009 07:55 GMT
65K
[B]58K[/B]
-39
-144
Mar 2009
03/31/2009 07:55 GMT
52K
[B]69K[/B]
+1
-13
[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.
[U]March 2009 German Unemployment Change
[/U]
Unemployment in Germany increased 69K to 3.4M in March, which raised the jobless rate to 8.1% from a revised reading of 8.0% in February, and the labor market is expected to weaken further as the region faces a deepening recession. As the downturn in the global economy intensifies, firms may continue to scale back on production and employment as demands from home and abroad falter, and conditions are likely to get worse as Europe’s largest economy is expected to face its worst economic slump in over half a century. As a result, the European Central Bank is anticipated to ease policy further next month, and may lower the overnight lending rate by 50bp to a record-low of 1.00% however, as President Trichet remain reluctant to overshoot the interest rate, the central bank may adopt a wait-and-see approach as they maintain their one and only mandate to ensure price stability.
[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][U]Bullish Scenario:[/U][/B]
[B][U][/U][/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 CAD 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 USDCAD ahead of the data release.
[B][U]Bearish Scenario:[/U][/B]
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 CAD 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 USDCAD ahead of the data release.
[B]How To Trade This Event Risk [/B]
The euro may continue to face increased selling pressures over the week as economists forecast German unemployment to rise 64K in May, and the data could reinforce fears of a deepening downturn in the economy as businesses continue to scale back on production and investments in an effort to weather the worst recession in over half a century. 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 suggests conditions are likely to get worse as the government anticipates the annual rate of growth to contract 6% this year. At the same time, a report by the Federal Statistics Office showed retail sales unexpectedly fell 1.0% in March, while the annual rate of consumption slipped -1.5% from the previous year, and expectations for a weakening labor market foreshadows a dour outlook for private spending as households face fading demands for employment. Moreover, Germany’s BaFin President, Jochen Sanio, said that banks within the region have approximately EUR 200B in bad debt , and warned that the liabilities held by the institutions could blow up ‘like a grenade,’ with the write-offs having potential to reach EUR 816B , which is more than double the total reserves held by banks, according to a report by the Telegraph newspaper. The comments from the head financial regulator suggests the global financial crisis will continue to weigh on the real economy throughout the year, and the European Central Bank is like to take additional steps over the near-term in order to stem the downside risks for growth and inflation. As President Trichet projects disinflation to keep price growth below the 2% in 2009, while board member Ewald Nowotny expects the central bank to lower the growth forecast in June, the central bank is expected to adopt tools beyond the interest rate at next month’s meeting to stimulate the economy going forward. At the same time, as the Governing Council fails to meet on common ground, market participants have argued that the lack of decisive action could pose a threat to long-term stability, and fears of a prolonged downturn could weigh on the exchange rate going forward. Nevertheless, as risk trends continue to drive price action in the forex market, a rise in market sentiment could lead the euro higher as investors raise their appetite for risk.
Expectations for a rise in the jobless rate favors a bearish outlook for the single-currency but at the same time, price action following an enhanced labor report could set the stage for a long euro trade. Therefore, if German unemployment increases 50K or less, we will look for a green, five-minute candle subsequent to the release to confirm a buy entry on two lots of EUR/USD. Once these conditions are met, we will set 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 in an effort to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.
On the other hand, speculation for a downward revision in the ECB growth forecast paired with fears of a deepening global recession could weigh on the outlook for future growth, and deteriorating fundamentals is likely to weigh on the single-currency as the central bank maintains a dovish outlook for future policy. As a result, an in-line print or a rise of more than 64K in unemployment could pave the way for bearish price action, and we will follow the same setup for a short euro-dollar trade as the long position mentioned above, just in reverse.
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