Euro, Bund And Equity Traders Look For A Strong Start On German Trade

How Will The Markets React?

European capital markets have been inactive since last Thursday due to the Easter holiday. Now that traders are back on the exchange floors and at their computer terminals, there will be a heightened demand for a fundamental trigger to start the markets off on a high note. Looking at the economic calendars for the member economies in the Euro Zone, there seems to be only one indicator that has shown any consistency with its market moving potential – the German trade account. Just hours before the actual release, the market was working with a consensus for a modest contraction in February’s balance to a €15 billion surplus from €16.2 billion the month before. Though there are few indicators that can directly supplement such expectations, a few may indirectly guide speculation. From the perspective of imports, which fell 1.8 percent in January, rising energy prices and a bump in retail sales over the same period support expectations of a slimmer positive trade gap. Of particular concern are crude oil prices which were nearly 25 percent higher than the previous month’s lows – portending a considerable weight on trade flows. Alternatively, those indicators related to exports were robust as well, though it is difficult to determine whether the data was influenced by domestic or foreign demand. For the month, factory orders jumped the most since December of 2004 while industrial production followed January’s 1.5 percent acceleration in activity with a 0.9 percent pick up. However the data hits the wires, economists and monetary policy officials will have their biases in place. In particular, the recent waver in consumer spending will be a lingering issue for those expecting expansion to further its six-year highs. Another issue traders should keep in mind when positioning before the German data prints is the anticipated BoJ rate hike. Preceding the ECB’s own policy decision, any surprise from Japan could ripple through the markets in the form of volatility.

Bonds – 10-Year German Bund Futures

Bunds have steadily lost ground since late March when ECB President Jean-Claude Trichet rallied inflation hawks by reminding them that the monetary policy group believes the inflation outlook is susceptible to upside risks like a rebound in energy prices. Since this move was instigated though, few economic indicators or speeches have curbed the steady rise in yields. The next report on the docket that can throw bund’s steady march off is Tuesday morning’s release of the German trade balance. If the number prints in line with expectations of a modest contraction, the reaction in Bunds is likely to be modest since an ECB rate decision is due only a few days later. On the other hand, a surprise could unsettle the markets calm and send Bunds barreling to 114.15 or back towards 116.45.





FX – EUR/USD

As EURUSD price action has come to a near standstill amidst the Easter holiday for US and European markets, the chances of an impending breakout appear more and more ominous. The pair has narrowed between trendline support and the early March high of 1.3441, and with price hesitant to move far from the 1.3400 level, the release of the German trade balance could be the spark to get EURUSD moving. The trade surplus is anticipated to fall back to 15 billion euros in February, but if the balance narrows more than expected –  signaling that exports are suffering at the hands of a stronger Euro –  the EURUSD pair could be in for a quick decline. Conversely, a surprise jump in the release could keep EURUSD in its recent uptrend as the data would infer that German expansion continues to be supported by the export sector. This would also raise speculation that the European Central Bank will hike interest rates to 4.00 percent by May. Nevertheless, more significant price action likely will not occur until Thursday, when the ECB holds their next policy meeting. While the central bank is anticipated to keep their benchmark steady, traders will be looking for hawkish commentary by ECB President Jean-Claude Trichet and, most notably, a return to the phrase “strong vigilance.”





Equities – German DAX Index

Throughout much of late March, German equities surged higher – in line with other stock indices around the globe – as shares retraced their losses from February 28 and the following days. In fact, trader sentiment has been so hot in the German DAX Index that price gapped higher on the daily charts through resistance at the February high of 7040.20. However, most European markets have now been on holiday for the past four days. When trading resumes early tomorrow and liquidity comes rushing back into the markets, the DAX will likely gain following the rise in Japanese and US equities on Monday. Nevertheless, US shares only made tepid gains, which may have little impact on European equities. Furthermore, the release of the German trade balance could shake traders up if the surplus narrows more than expected, signaling that exports are suffering at the hands of a stronger Euro. As a result, the DAX would likely ease back towards support as the prospects for manufacturers’ profits would diminish amidst declining output. On the other hand, a surprise jump in the release could keep shares on their sharp uptrend as German expansion would continue to be supported by the export sector.