The Euro continued its advance in today’s session, rallying as high as 1.4218 at the start of the NY session. We continue to have the relief rally this week as Greece has passed its first and main austerity vote before a second vote later today on implementation.
The EUR/USD managed to break through the highs from the last two weeks, and may now be targeting the 1.47 are, the highs we hit in early June.
In the beginning of the week we had positive news from France in that French banks were willing to participate in a voluntary debt rollover. Today we heard the same from Germany.
From Bloomberg: “Germany’s biggest banks and insurers and the government agreed on a draft proposal to roll over Greek debt holdings before a meeting with Finance Minister Wolfgang Schaeuble today, people familiar with the plan said.
The firms will commit to providing financing for a Greek aid package, said the people, who declined to be identified because the talks are private. The draft, which may change during the meeting between Schaeuble and industry executives, left open how much debt would be rolled over and under what conditions, they said.”
Now that both French and German banks are on-board, though the full details of German participation are still unclear, it is up to policymakers and the banks to agree to such a way to do this participation that it would not be categorized as a “credit event” or “selective default” by credit rating agencies. This has been the ECB’s position.
We also now await further details of a 2nd Greek bailout.
In the meantime we got some interesting data from Germany in the form of retail sales and employment.
Retail sales fell fell quite sharply in the month of May, sliding 2.8% on the month compared to expectations of a 0.6% increase. Sales were flat in April. That was the largest slump in nearly 4 years.
The data points to weakness in domestic demand despite a labor market with an unemployment at decade lows. That means that Germany will have to continue to rely on export driven demand as domestic consumer spending remains restrained. That should have a bearing on the 2nd quarter GDP figures, and could be a warning sign in terms of the economy entering a period of slowdown.
From Wall Street Journal: “The sales data appear to contradict other German economic confidence indicators, which are flashing green as the country’s economy rebounds sharply from the financial crisis.
German market research group GfK said Tuesday its forward-looking consumer climate index is set to rise in July, reversing the weakening trend of the past few months, as income expectations improve significantly and the upward momentum of the German economy continues.
German research institute Ifo said last week that German business confidence rose in June for the first time since February, to 114.5.”
Part of the blame for the weak report fell on higher oil and gasoline prices, which cut into household incomes, as well as an outbreak of E. coli which cut into food sales.
In a second important release we saw the number of unemployed fall by 8K, which meant the total number of unemployed stayed below the 3 million mark. However, the drop was lower than the 17K decline expected.
From Bloomberg: “German unemployment declined for a 24th straight month in June, underscoring the resilience of Europe’s largest economy amid the euro region’s debt crisis.
The number of people out of work fell a seasonally adjusted 8,000 to 2.97 million, the Nuremberg-based Federal Labor Agency said today. Economists forecast a drop of 17,000, according to the median of 32 estimates in a Bloomberg News survey. The jobless rate held at 7 percent, the lowest since records for a reunified Germany began in 1991.”
In the Euro-zone as a whole, today also saw the release of inflation data, which came in cooler than expected. Inflation for the month of June, the preliminary version, registered a 2.7% reading which was the same as we had in May, and also lower than expectations of a bump higher to 2.8%. Still, inflation continue to run above the ECB’s 2% target and the last few days Trichet has been talking an interest rate increase next week.
He did so yesterday and again today.
From Bloomberg: ““The monetary policy stance is still accommodative and risks to price stability are on the upside,” Trichet told lawmakers in Brussels today. “We are in a state of strong vigilance and we stand ready to act in a firm and timely manner to avoid that recent price developments give rise to broad-based inflationary pressures over the medium term.”
What does all this data mean for the EUR?
Well, even though German retail sales data came in weaker than expected, so far it has not been a major part of the country’s overall growth, though hopes had been it would pick up considering the picture in the labor market. That can still happen, but perhaps skewed more towards the second half of the year. The unemployment data, while missing forecasts, is still the best its been in a decade and so no real threat to the German recovery there. The inflation data in the wider Euro-zone has started to miss forecasts consistently, and with one more rate hike we may see the ECB wait another 2-3 meetings before thinking about raising rates again. Therefore while we have a big focus on the rate hike upcoming, its more important to factor in what comes after next week’s ECB meeting. If the ECB takes a more cautious approach then the EUR may lose some of its luster from the prospect of higher rates. We should continue to look for German data to guide the way forward for the ECB.
We’ll get more clues to their thinking next week, but for now we want to see how the EUR/USD and other EUR crosses respond to the very strong rally of this week. Do we need to correct this move? Will it be a shallow 23.6% retracement of this week’s upswing? Or, will some bump along the road in the sovereign debt situation knock the EUR back further. If attention turns back to fundamentals, next week’s ECB meeting can hold another “buy the rumor, sell the news” moment if Trichet does not sound hawkish enough. Till then we await general global data including a slew of manufacturing reports which can have a strong impact on risk sentiment and our higher yielders including the EUR.
For a technical analysis look at the EUR/USD see today’s Technical Update: EUR/USD Channeling Upwards; Now Testing Triangle Resistance
Nick Nasad
Chief Market Analyst
FXTimes
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