IB FX View

Eurozone growth slump accentuates risk reversion

Friday May 15, 2009

We’d possibly be over analyzing things if we concluded in Friday’s daily forex view that the dollar had a pretty good week. In reality, it’s probably safer to say that the euro had a fairly lousy one. The already present headache brought on by discord among ECB policymakers over asset purchases was lifted to migraine status to finish the week as a report confirmed the bleak status of first quarter growth. As a result the euro is set to close down around 0.6% on the week against the dollar. Growth-sensitive currencies also reached something of a tipping point with the Aussie and Canadian dollars each facing a weekly slide against the recently out of favor greenback.


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Let’s start with that awful GDP reading from Eurostat in Luxembourg. Economists had predicted a 2% growth contraction after a fourth quarter decline of 1.6%. In the event, the report showed a Eurozone output fall of 2.5% with German output recording a 3.8% decline after contracting 2.2% last time around. That’s the worst reading on record for German growth since records were first compiled in 1970. For the Eurozone as a whole there hasn’t been a weaker reading since collaborative data was conceived in 1995.

Here’s the rub. Had this data been released two weeks ago investors might have taken a different and more positive view. While we all know this is backward looking data, it’s first and foremost a pretty lousy health-check on European activity. But second of all, the weakness in recent retail sales data coinciding with the slowdown in the velocity of contraction has served up a reality check, prompting investors to realize that the consumer faced with rising unemployment is hardly the answer to dragging any economy out of its mire. This week proved that the consumer is likely to save more and spend less. As such today’s data pulls the rug from the recent euro recovery story.

To validate that point look at other euro-crosses this week. The euro today buys 129.23 and so 3.6% less yen than one week ago. The yen has been strong in its own right all week long as the growth rebound story takes a bashing. The euro has lost 0.7% against the British pound and has fallen to purchase 88.88 pennies today. And to ice the cake, the euro is weakening against the Swiss franc despite the SNB’s bravest efforts to warn that it might just come along any minute now and buy more francs if you don’t watch out. The euro buys Sfr1.5037 from last Friday’s Sfr1.5074.

It has been an uphill struggle for dollar bulls of late with contenders using arguments for global economic recovery as a beating stick to damp their spirits. With global growth come two things: Rising commodity prices and rising equity prices seemingly vindicate dollar bears’ stance. But since this week’s peak at $60.85 for July crude oil futures on Nymex, crude’s price has since slipped back to $58.66 on both over-supply concerns as well as demand recovery prospects around the globe. Meanwhile gold at close to $930 an ounce indicates rising concern over the health of the global economy.

The Aussie dollar has fallen from 76.86 to 75.62 U.S. cents one week ago. The U.S. dollar also buys more Canadian dollars than one week ago and has risen from C$1.1495 to C$1.1713. Meanwhile the benchmark S&P 500 index is revisiting a former resistance zone. But the weekly decline from 929 to 889 marks a weekly loss of 4.3%. Risk has turned over and it would be no surprise to see the dollar head back to the nearest round-number against the euro during the course of next week.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com

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