Tuesday, March 11, 2008

EUR/USD: ZEW Investor Survey Likely to Reflect Dismal European Sentiment

Despite a mild improvement last month, investor sentiment throughout the Euro-zone is anticipate to deteriorate as the ZEW survey is forecasted to fall to a record low of -42.0 from -41.4. The news will not be entirely surprising, as the European Commission’s most recent surveys of economic, industrial, and services sector confidence all dropped more than expected.

11-Mar Euro-zone ZEW Survey (MAR) (10:00 GMT; 05:00 EST) German ZEW Survey (MAR) (10:00 GMT; 05:00 EST)
Expected: -42.0 Expected: -40.0
Previous: -41.4 Previous: -39.5


What Are The Markets Facing?

Despite a mild improvement last month, investor sentiment throughout the Euro-zone is anticipate to deteriorate as the ZEW survey is forecasted to fall to a record low of -42.0 from -41.4. The news will not be entirely surprising, as the European Commission’s most recent surveys of economic, industrial, and services sector confidence all dropped more than expected. Indeed, building price pressures are hurting disposable income for consumers and denting profit margins for businesses, and things are only getting worse. The European Commission’s flash estimate for February CPI held at a 14-year high of 3.2 percent, which leaves the European Central Bank very little room for maneuver regarding monetary policy. Indeed, given ECB President Jean-Claude Trichet’s press conference comments last week, it appears that the central bank remains staunchly hawkish tone as he said, “The latest information has confirmed the existence of strong short-term upward pressure on inflation...The economic fundamentals of the euro area are sound...Yet the level of uncertainty resulting from the turmoil in financial markets remains high. Against this background, we emphasize that maintaining price stability in the medium term is our primary objective in accordance with our mandate.” Another major issue for investors is the value of the euro, as its rapid appreciation to record highs hurts prospects for export growth. On the other hand, the strong currency is helping to offset import price inflation, which is likely why Trichet has only resorted to mild verbal intervention. Overall, Tuesday’s sentiment data will likely highlight the dim prospects for the Euro-zone, and if the figures are worse-than-expected, markets may start to bet that the ECB will seriously consider cutting rates as soon as CPI eases back.

Dollar Falls to Record Lows

Over the last couple weeks, the Dollar has plummeted against all of the major currencies, falling below the $1.50 mark against the Euro for the first time ever. It seems investors are reacting to a spate of negative economic data which are painting an increasingly bearish picture for the US economy. In addition, the Fed seems likely to lower rates further while the ECB will maintain rates at current levels. For a brief period, talk of recession was actually helping the Dollar, as investors predicted that the global economy would be harmed more than the US economy, but it looks like that period has passed. As a result, the EU is growing increasingly alarmed, and the pressure is building for some kind of intervention. AFX News Limited reports:

Euro group president Jean-Claude Juncker said currency markets are overreacting to the short-term outlook for the US economy. " We don't like excessive volatility in exchange rates," Juncker said.

Monday, March 10, 2008

Euro Powers Past 1.50

The dollar extended its losses further, reaching another record low versus the euro beyond the 1.51-handle to 1.5144 while briefly falling past the 106-level against the yen to 105.97. Continued weakness in US economic reports and further pricing in of additional FOMC rate cuts prompted the renewed selling in the greenback. Fed Chairman Bernanke again gave a somber assessment of the US economy in his semi-annual Congressional testimony raising market expectations for more policy easing in the coming months.Bernanke said the “economic situation has become distinctly less favorable”, citing lingering tight credit conditions and a slowing labor market. He expects the housing market deterioration to continue to weigh on the economic in the coming quarters with risks for growth remaining to the downside. Bernanke said the risks “include the possibilities that the housing market or labor market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further”. He said the Fed expects inflation to moderate; suggesting overall PCE will “moderate significantly” in 2008 to between 2.1%-2.4%. Chairman Bernanke’s testimony reiterates the Fed’s focus on stimulating growth and highlights a shift inflation data has taken, moving to a secondary role behind data impacting growth. The economic reports released today furthered the case for a 50-basis point rate cut to 2.5% when the FOMC meets in March. Durable goods orders in January plunged by 5.3%, exceeding estimates for a 4.0% drop and sharply reversing from December’s 5.0% increase. The excluding defense durable goods orders also posted a sharp drop, falling by 4.7% versus calls for a 1.2% fall from a 2.7% increase a month earlier. New home sales for January also decline by more than forecasts at 588k units, compared with 604k units previously.

USD Losses Accelerate

The beleaguered dollar found no reprieve against the majors, with the accelerated selling pushing the currency to fresh all-time lows against the euro, Swiss franc, 24-year lows versus the Aussie and 3-year lows versus the yen. Underscoring the greenback’s weakness has been the continued deterioration in US economic reports, raising fears of an imminent recession and reaffirming the Fed’s need for further aggressive monetary policy easing over the coming months. The reports today included January PCE, consumption, personal income, February Chicago PMI and the University of Michigan sentiment survey. Inflation remains firm as the January PCE price index edged higher with the monthly figure ticking up to 0.4% from 0.2% and 3.7% versus 3.5% a year earlier. The core PCE price index firmed to 0.3% m/m and 2.2% y/y. Personal consumption was flat in January and personal income eased to 0.3%, down from 0.5%. Boding poorly for the economy and the greenback was a dismal February Chicago PMI report, which fell sharply to 44.5, far greater than the expected decline to 49.7 from 51.5 from January – beneath the key 50-level. However, the University of Michigan sentiment survey in February fell by slightly less than estimates, declining to 70.8 instead of forecasts for a fall to 70 from 78.4 a month earlier. Central bank policy decisions and US economic data will dominate the headlines next week. The ECB, BoE, BoC, BoJ and RBA are scheduled to announce policy decisions, with the Reserve Bank of Australia seen tightening rates by 25-basis points to 7.25%. The key highlight from the US will be Friday’s labor report, with the unemployment rate for February expected to edge higher to 5.0% from 4.9% and non-farm payrolls reversing the 17k jobs contraction from January, growing by 35k.

Hawkish ECB Sparks Euro Rally

The dollar found no reprieve in the Thursday session ahead of tomorrow’s closely watched February labor report – stumbling to fresh all-time lows against the euro just shy of the 1.54-mark and a 3-year low versus the yen at 102.56. Fears of a US economic recession continue to plague the currency with burgeoning expectations that the FOMC will aggressively cut rates at the March 18th meeting. We look for the Fed to ease rates by 50-basis points to 2.5%, while simultaneously leaving the door open for additional cuts over the coming months.The US reports released today saw weekly jobless claims fall back to 351k, from 373k a week earlier and January pending home sales flat, versus a 1.5% decline from December. Market attention to turn to Friday’s highly anticipated February labor report. Recall January’s report sharply disappointed estimates, contracting by 17k jobs. Consensus estimates are calling for payrolls to grow by 25k jobs. However, in the event the non-farm payrolls post another significant job contraction, we look for the euro to power past the 1.55-level. The February unemployment rate is also seen worsening, edging up to 5.0% from 4.9% in January.