Forex: Euro Vulnerable as ECB Stimulus Bets Defy Draghi Comments

2013-11-22 06:45:00 Ilya Spivak, Head Strategist, APAC

Talking Points:

Spotlight on German Data in Europe, Final 3Q GDP and IFO Survey Releases on Tap
Eurozone News-Flow Has Underperformed, Warning of Downside Surprise Potential
Euro Looks Vulnerable as Evidence Favoring an Expanded ECB Stimulus Effort Builds

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German economic data headlines the calendar in European trading hours. The final revision of third-quarter GDP data is expected to confirm initial estimates showing a quarterly increase of 0.3 percent. Meanwhile, November’s IFO Survey of business confidence is forecast to show the headline Business Climate gauge rebounded to 107.7, erasing October’s downtick to match the print recorded in September.

Euro-area economic data has underperformed relative to expectations since late August according to data from Citigroup, opening the door for a downside surprise. Such an outcome may weigh on the Euro as traders consider the possibility of further easing from the ECB.

While the central bank’s President Mario Draghi talked down speculation about introducing negative deposit rates yesterday, the argument for some kind further action remains compelling. This month’s surprise rate cut followed an unexpected drop in the year-on-year CPI inflation rate to 0.7 percent, the weakest in four years. Since then, economists have dramatically revised down median price growth forecasts and markets in kind, with inflation bets priced into bond yields down dramatically across the maturity spectrum.

Yesterday’s flash estimate of Eurozone Composite PMI showed factory- and service-sector activity grew at the weakest pace in three months in November, warning that lackluster growth will put further downward pressure on price levels. That suggests the ECB may have to act regardless of Mr Draghi’s protestations (although in fairness, the course of action to be taken need not include negative deposit rates per se). We remain short EURUSD.

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Asia Session:

GMT	CCY	EVENT	ACT	EXP	PREV
21:45	NZD	Net Migration s.a. (OCT)	3000	-	2790
5:00	JPY	BOJ Monthly Economic Report (NOV)	-	-	-

Euro Session:

GMT	CCY	EVENT	EXP/ACT	PREV	IMPACT
7:00	EUR	German GDP s.a. (QoQ) (3Q F)	0.3%	0.3%	Medium
7:00	EUR	German GDP w.d.a. (YoY) (3Q F)	0.6%	0.6%	Medium
7:00	EUR	German GDP n.s.a. (YoY) (3Q F)	1.1%	1.1%	Medium
7:00	EUR	German Domestic Demand (QoQ) (3Q)	-	0.6%	Low
7:00	EUR	German Private Consumption (QoQ) (3Q)	0.2%	0.5%	Low
7:00	EUR	German Government Spending (QoQ) (3Q)	0.3%	0.6%	Low
7:00	EUR	German Capital Investment (QoQ) (3Q)	0.7%	1.9%	Low
7:00	EUR	German Construction Investment (QoQ) (3Q)	1.5%	2.6%	Low
7:00	EUR	German Imports (QoQ) (3Q)	0.6%	2.0%	Low
7:00	EUR	German Exports (QoQ) (3Q)	0.3%	2.2%	Low
9:00	EUR	German IFO – Expectations (NOV)	104.0	103.6	High
9:00	EUR	German IFO - Business Climate (NOV)	107.7	107.4	High
9:00	EUR	German IFO - Current Assessment (NOV)	111.5	111.3	High