EURUSD: Trading the German ZEW Investor Confidence Survey

[B][U]Trading the News: German ZEW Investor Confidence Survey
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[B][U]What’s Expected[/U][/B]

Time of release: [B]07/14/2009 09:00 GMT, 05:00 EST[/B]
Primary Pair Impact[B] : EURUSD[/B]

Expected: 48.0

Previous: 44.8

[U][B]Impact the German ZEW Survey report had over EURUSD for the past 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]

                                                     June 2009

                                   06/16/2009 9:00 GMT

                                   35.0

                                   [B]44.8[/B]

                                   -38

                                   -77

                                                     May 2009

                                   05/19/2009 9:00 GMT

                                   20.0

                                   [B]31.1[/B]

                                   -15

                                   -10

[U]June 2009 German ZEW Survey[/U][U][/U]

                                     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.

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April 2009 German ZEW Survey[/U]

                                     Investor sentiment in Germany rose to a three-year high in May as the ZEW survey jumped to 31.1 from 13.0 in April, and the data encourages an improved outlook for future growth as policymakers project economic activity to stabilize later this year. At the same time, the gauge for the current situation slipped to -92.8 from -91.6 in April following the record drop in 1Q GDP, and fears of a protracted downturn may continue to weigh on Europe’s largest economy as Bundesbank President Axel Weber anticipates economic activity to remain subdued throughout the year. At the same time, the ECB lowered the benchmark interest rate by 25bp to a record-low of 1.00% earlier this month, and plans to commit EUR 60B in covered-bond purchase in an effort to soften the landing of the economy, and the unprecedented measures taken on by the central bank should help to stem the downside risks for growth and inflation.

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[/B][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 ZEW investor confidence survey is widely expected to improve for the ninth consecutive month in July, with economists forecasting a rise to 48.0 from 44.8 in the previous month, and the data could encourage an enhanced outlook for future growth as policymakers anticipate the economy to emerge from the recession later this year. Earlier this week, the International Monetary Fund reinforced an improved outlook for global growth, with the group anticipating a stronger recovery next year than it had initially expected, while price pressures are expected to ‘remain subdued throughout 2010, held back by significant excess capacity.’ Moreover, the European Central Bank expects economic activity in the euro-region to ‘decline less strongly’ throughout the rest of the year as the Governing Council takes unprecedented steps to stem the downside risks for growth and inflation, with the board assuring that the current policy is ‘appropriate’ as they anticipates ‘a gradual recovery’ next year. However, as the Bundesbank projects GDP to contract at an annual rate of 6.2% this year, the downturn in global trade could raise the risks for a protracted recession, and growth prospects are likely to remain subdued throughout the rest of the year as the global financial system remains weak. Moreover, the Sentix investor confidence survey for the Euro-Zone unexpectedly declined in July, with the index contracting deeper into negative territory, and the downturn in economic sentiment foreshadows a dour outlook for Europe’s largest economy. Meanwhile, German Finance Minister Peer Steinbrueck warned business in the region may continue to face difficulty in obtaining credit throughout the second-half of the year, and cautioned some sectors of the economy could face a credit crunch later this year as banks tighten lending practices. At the same time, Bundesbank President Axel Weber countered the arguments and downplayed the risks for further deterioration in the credit market, stating that the central bank would consider taking additional policy measures ‘only if the banking system were dysfunctional.’ As a result, market participants speculate the Governing Council will maintain the floor on the benchmark interest rate going forward, and long-term expectations for higher interest rates could lead the euro higher over the near-term.

Trading the given event favors a bullish outlook for the single-currency as market participants anticipate investor sentiment to push higher in July, and price action following the release could set the stage for a long euro-dollar trade. Therefore, an in-line print or a rise above 48.0 would lead us to 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, and this risk will determine our first objective. Our second target will be based on discretion, and in order to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.

In contrast, fears of a credit crunch paired with concerns for a protracted downturn may lead investors to curb their outlook for future growth, and an unexpected drop in the ZEW survey is likely to drag on the exchange rate as growth prospects deteriorate. As a result, if the index falls to 35.0 or lower, we will favor a bearish outlook for the single-currency and will follow the same strategy for a short euro-dollar trade as the long position mentioned above, just in reverse.

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