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Euro Drops as German Exports Collapse
Last Updated 1/8/2009 4:16:09 AM EST (GMT +5)
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Overnight Eco
Event Risk on Tap
Price Action
The EUR/USD gave up all of it late Asian session gains slipping below the 1.3600 figure in early European trade as news of a much sharper than expected contraction in German Trade surplus weighed on the unit. German trade surplus shrank to 10.7 Billion euros - far worse than the 14.0 Billion euro expected by the market, as exports collapsed by more than 10% in November due to massive pullback in global demand for capital goods.
The November data does not bode well for next months numbers given the fact that exchange rates moved against German exporters at the end of 2008 while global demand continued to weaken. Since Germany is the primary generator of trade surpluses in the EZ tonight’s downside surprise suggests that the region as a whole will now begin to show a string of significant Trade deficits further weakening its balance sheet position.
Yet despite continuing disappointments in economic performance which indicate that the contraction in EZ GDP could be far more severe than ECB forecasts, European monetary officials are reluctant to slash interest rates aggressively. In an article entitled “ECB shuts its ears to rate cut call” today’s Financial Times reports that Mr. Trichet and company have stubbornly refused to signal a 50bp cut and may perhaps opt for a more modest 25bp of easing next week. One key consideration that may be driving the policymakers decision making process is strong aversion to taking rates close to zero percent level. FT quotes Mr. Trichet as stating that, ““We have to beware of being trapped at nominal levels that would be much too low,”
Nevertheless, events on the ground may overwhelm the monetary authorities best intentions especially if unemployment begins to increase rapidly. The political pressure on the ECB will become immense if officials are seen as aggravating an already painful economic situation. The currency market therefore reacted swiftly to tonight’s news as traders begin to come to a consensus that ECB will have to lower rates eventually.
In North America today traders in US will be looking at weekly jobless claims data especially in light of horrid ADP numbers yesterday. As we noted on Wednesday the market is already prepared for a negative NFP number so anything within the -500K range may actually be viewed as positive for the buck. For the time being 1.3500 could be the battleground for the day as New York traders may try to run the stops through that level given the poor German trade data overnight.
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About The Author
Schlossberg has more than 20 years experience financial trading on Wall Street. His daily currency research appears in numerous newspapers worldwide and Schlossberg serves as a regular contributor to CNBC's Squawk Box and Bloomberg radio and television. Read more >>