Germany not immune to EUR troubles

They came, they saw and they talked, then they talked some more. That was about it from the Euro-group meetings yesterday. It concluded with the usual obligatory remarks; praising Greek austerity measures to date. It was noted that despite substantial progress towards agreement on paying the next tranche of Greek aid, the overall agenda fell well short of a final deal on the subject. It seems that Euro officials are already now looking towards the November 20 meeting as the ‘appropriate time for making an official decision on continued support.’ The one thing that the market can be assured of is that uncertainty will reign supreme until then.

Meanwhile, European and Spanish officials continue to run rings around themselves, giving no indication that the Iberian nation is likely to make a pre-emptive request for further EU support prior to year-end. The market believes Spain needs it, the country itself requires it, but optics won’t allow it, for the moment at least. The on going Euro saga has investors hitting the sell button on risky assets as meeting upon meeting yield little progress. The IMF and the Euro-group leads remain at ‘loggerheads’ over whether the Greeks should be given an extension of 2-years more to reach a debt to GDP target of +120%; Lagarde is keen to stick to 2020. With risk to sovereign spreads skewed to the upside and expectations for further ECB easing building, the single unit again looks vulnerable to a new downturn. Even the Chinese sovereign wealth fund is second-guessing their global strategy!

UK’s annual rate of inflation rose last month (+2.7%, y/y), driven mostly by a rise in University tuition and the other ‘old’ staple, food prices. This was the highest print since last May and easily topped the September print of +2.2%. Prices rose +0.5%, m/m. The rise reflects the maximum jump in tuition fees allowed. The UK university tuition cap rose this month to +GBP9k from +GBP3.3k, prompting many institutions to lock the allowed higher fees. The weather can be blamed on the food price hike. This morning, GBP has benefited from the higher than expected inflation print. It certainly is a blow for the ‘doves’ that are calling for more UK QE.

While in Germany, the supposed backbone of Europe, the economic situation changes from one economic release to another, and not for the better. The ZEW investor survey has come in significantly weaker than expected, with economic sentiment falling to -15.7 from -11.5 vs. expectations of an improvement to -9.8. It is the latest sign that the Euro-zones largest economy is likely to deteriorate even further in the coming months as the debt crisis drags on. This is strong proof that the German economy will most likely not be able to sidestep the broader Euro slowdown. Dare we utter German contraction in Q4? Germany falling into a recession outright is probably unlikely, however, the risks and warnings are there. Today’s release goes hand in hand with the weaker IFO and PMI reports released over the past few weeks. It’s no big surprise to see it in black and white; however, it’s never easy to see ‘another’ giant stumble.

Nov 13

The EUR bears feel in control. The techies have revised their medium-term target, expecting further overall losses towards a ‘new’ handle of 1.2560 (close to the September 6 low) in the coming sessions. The expectations near term are for a test of 1.2607, yesterday’s ideal line. The daily momentum still remains negative, adding to the overall bearish market theme.

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell