IB FX View

Euro fails to take the lead from ZEW survey

Tuesday August 18, 2009

Tuesday’s pre-market trading was buoyed by a reprieve for Asian stock markets, whose decline was stemmed by the feeling that prices had decayed enough. A better tone for German confidence among investors and analysts helped the euro and compounded risk appetite. But that was before weakness in U.S. housing starts reminded the investment community that previously positive data can very easily revert to a mundane reading without any warning. Global recovery isn’t catching fire as investors had hoped for earlier in the summer and that fact keeps the bias towards a firmer dollar.


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When you consider that the French and German economies grew by 0.3% in the second quarter, it’s no surprise that confidence is bouncing back. That was the message today from the Mannheim-based ZEW instate for European Economic Research, whose survey has a good record of predicting economic conditions six months in advance. After a boost from a $120 billion government stimulus and a pick-up in global trade, which appeals to the structure of German manufacturers, the survey rose to its highest reading in over three years.

The euro at $1.4116 is now coming back from an earlier loss, but it still feels rather underwhelming given the slew of positive economic news in the Eurozone in the past week alone. In the aftermath of today’s data the euro earlier reached $1.4154 before sliding to $1.4081.

The breakdown of sentiment across different economic sectors within today’s ZEW report reveals the importance of exports within the German economy. Sectors such as electronics, technology and machinery saw the most significant improvement in sentiment. But while a surge in export-growth may be behind prevailing optimism many economists point to the fact that weaker domestic labor markets ahead (not to mention the likely ongoing rise in the United States) provide a stiff headwind for better demand conditions.

The pound was earlier bolstered after a beating yesterday against the dollar. Today it’s trading at $1.6518 after consumer price inflation for July remained at an annualized 1.8% despite predictions of a decline to 1.5%. However, the rate is likely to slip further later this year according to the latest predictions from the Bank of England who see consumer prices slipping below 1% this year and so missing the mandated target.

The end in weakness to Asian equity prices helped support metals and energy prices throughout the morning, which helped give some positive direction for both Aussie and Canadian dollars today. The Aussie also had to contend with the minutes from the latest RBA meeting, which removed some of the gloss. The RBA noted within its discussions that any rise in interest rates had to be carefully pitted against the risk of crushing confidence prematurely. What we’re not sure of here is whether this though is that of a member warning other more gung-ho members of the board against acting too quickly. The Aussie today buys 82.24 U.S. cents and is only marginally stronger today. The rally in crude oil prices also helped underpin the Canadian dollar, which today buys 90.32 cents.

Andrew Wilkinson                                                                    

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com       

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