IB FX View

The Eurozone did what?

Thursday August 13, 2009

Call me a skeptic but today’s word that the Eurozone actually returned to growth in the second quarter with a 0.1% expansion is a proper bolt-out-of-the-blue. Investors bought the story lock, stock and barrel sending the euro to its highest in a week against the dollar before a disappointing retail sales reading. The euro is off its best level but is almost a cent higher than Wednesday’s close and is currently trading at $1.4283. Investors also favored the Japanese yen on the unexpected confirmation that the consumer remains cash-strapped and debt focused regardless of the boost from the cash-for-clunkers program.


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Let’s start with the joint news that the German and French economies both grew at a 0.3% percent pace in the second quarter. Both the Italian and Dutch economies contracted and the Eurozone expanded at a 0.1% rate on average. Remembering that the British economy continued to slip by 0.8% and the U.S. contracted by 1% at the same time sends up large red flag that would do

Moscow Square

proud. Does this stellar performance mean that the German government and the ECB will soon be preaching from the highest hills in the land that their unlimited lending initiative was more successful than those of the Fed or the Bank of England? Watch out for uber-euro strength if this is the case!

Only a snapback in export demand could be behind the strength in the Eurozone. June’s retail sales fell unexpectedly while today’s surprise news was greeted with analysts’ predictions that a recovery would, like elsewhere, be slow and protracted. Awakening euro bulls need also be reminded that the rate of Eurozone unemployment is widely expected to reach 11.4% in 2010. Unless the data is revised to a more somber pace on September 2, we should expect to hear official upgrades to growth for the remainder of this year and into 2010. Currently the ECB expects a Eurozone contraction of 4.6% this year and 0.3% next year. Today’s bolt-out-of-the-blue ought to change such expectations if the data stands.

The dollar fought back after its double-dose of morning data. Most important was the decline in retail sales at a 0.1% clip compared to an expectation of a 0.8% rise. For an economy that the Fed yesterday described as “leveling out,” the data is another red flag, which is why the risk aversion trades took a tumble in the aftermath. A Eurozone recovery in the second quarter resting on an expansion of exports needs a rethink in light of final consumer demand.

Jobless claims in the U.S. continued to remain below a 600,000 count for the sixth-straight week. However, at 558,000 we’re still looking at a large number of claimants despite the decline in continuing claims to a reading of 6.2 million.

The British pound continues to claw its way back against the dollar but less so against the euro today. Sterling bulls were warned yesterday that any thoughts of a widening yield advantage through increases in British interest rates were likely premature. Declining price pressures ahead in the face of stiff growth headwinds will ensure little change out of the Bank of England for a couple of years. While that currently feels like a throwaway comment, the harsh reality is that the Bank’s current projection itself indeed shows no need for change. The pound rose today only because growth bulls are taking their lead from the rally in expectations for Eurozone growth. The pound is currently about a penny higher versus the dollar at $1.6584 and the euro today buys 86.14 pennies unchanged from midweek.

Commodity prices rose with copper tearing to a 10-month high on plans for ongoing increases in global industrial expansion. The commodity currencies today faced mixed fortunes. The overall temperament in the pace of U.S. expansion appears to be weighing on the Canadian currency, which is currently trading at 91.93 U.S. cents. The Australian dollar is faring better and has strengthened to buy 84.10 U.S. cents today.

Andrew Wilkinson                                                                    

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com       

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