Germany votes yes but the euro’s reaction is muted


Stocks jumped in the mid-morning session, as investors digested news that the German parliament had easily passed a vote to allow the July changes to the EFSF rescue fund, although the euro fell back from its highs of the session. Stock markets are brushing off economic data that continues to come in on the weak side.

Today’s vote in Berlin was expected to pass, what is more important is whether there is any appetite left for German lawmakers to extend the fund even further. Germany is crucial to formulating a solution to this problem, and without its support the Eurozone will be in a very bad place. The euro has managed to sustain the rally that began on Monday; however news that Germany had passed the vote on the EFSF hasn’t triggered a relief rally. This could be because a lot was priced in already, but the euro may remain stuck in a range for some time yet.

There are a few reasons for this in our opinion: 1, the euro was looking extremely oversold, and although this week’s move has been sustained it is still a short-covering trade in our opinion. We would need to see a break above 1.3850 for anything above 1.4000 to be a realistic target. The second reason is that EURCHF continues to trade well now that the SNB has wiped out Swissie strength. Swiss central bank buying of euro is also helping to support the single currency. Another reason is the dollar. The US economy has problems of its own and QE3 cannot be ruled out anytime soon. This is keeping enthusiasm for the dollar caged for now. So while the euro may not be back in fighting form, as we tread water waiting for the Ecofin meeting and the ECB next week, the euro may attempt to get back above the 1.3700 level.

As we have said before Europe’s sovereign debt crisis attacks growth by weighing on economic confidence. That was proved today when the consumer, economic, industrial and services sector confidence in the currency bloc all fell in August. Consumer confidence in the currency bloc is now at its lowest level since September 2009, while overall confidence in the economy has tumbled to a 19 month low. Weak levels of confidence can be a self-fulfilling prophecy and ultimately send the global economy into recession as businesses retreat from investing and consumers save rather than spend. Thus, it is up to Europe’s politicians to come up with a solution to the crisis and ward off a global slump, at least in the near-term.

In amongst all of the gloom in the Eurozone, the German economy is a beacon of light. Unemployment fell sharply in August, dropping by 26k, beating expectations of an 8k decline. This helped to push the unemployment rate down to 6.9%, the lowest level since reunification. The German economy is creating jobs, is an export powerhouse, has a deficit of 3.3% and has a plan in place to reduce its public debt ahead of schedule, thus it easily outshines the US right now. However, Germany holds the key to a continuation of its growth story. If it takes the lead and comes up with a plan to save the Eurozone then it could stave off a global slump and protect global trade.

There was some good news for the UK economy today as well. Mortgage applications rose at their fastest pace in 20 months in August, and consumer credit also rose by GBP 0.5bn, up from 0.2bn in July. Although this is positive news, funding conditions for the UK’s banks have become much more hostile since August, so lending to the economy may be compromised in the coming months until the sovereign debt crisis- the cause of the stress in the banking sector – is on a path to resolution.

In the US, a second reading of Q2 GDP is expected to be revised higher to 1.2% in Q2, up from 1%. Pending home sales will also be released, and are expected to fall by 2%.The Fed’s Operation Twist, a bid to bring down long-term interest rates that benefit housing and durable goods spending, has not yet fed through to the economic data. Over the next few months this data will be watched closely to see whether the Fed can do the Twist or not.

Also of note today is the Troika – EU, ECB and IMF – which arrives back in Greece. It is expected to release the next tranche of bailout funds for Greece, and bar any surprises this should be fairly hassle free. There are rumours that Greece’s medium-term fiscal plan will be revised. If the fiscal goals are reduced to more realistic levels then it would make it easier for Greece to hit its budget targets and get its bailout funds without causing such volatility in the markets every couple of months.

Source: Forex.com

29.09.2011