More Soft German Data Aligns Fundamentals With Technicals Setting Up The Euro's Demise
The German ZEW survey in September showed further declines in both components; the current situation survey fell to 43.6 from 53.5 in August, marking a steeper drop than the forecast decline to 45.0. On the economic sentiment front the survey dropped to -43.3 from -37.6 in August, a tad less than forecasts which had been centered on -45.0. The institute pointed out that the outlook was surrounded by a high degree of uncertainty as the breakdown showed that inflation expectations, interest rate forecast and stock market strength all took hefty knocks. Expectations for the euro were the least favourable, with weakness against all major currencies seen ahead.
The ongoing slowdown in growth across the EMU and around the world is set to continue for several months still and investor confidence is likely to keep falling. While Greece and other periphery nations are certainly at the centre of the maelstrom Germany is feeling the effects of the storm. As the largest and most robust economy in the EMU many watch the political and economic developments in Germany even more carefully than those in Greece. On the political front, we have already seen public sentiment toward multiple bailouts and the sending of taxpayer money to save their less responsible neighbors. While Chancellor Merkel overcame constitutional challenges to the bailout contributions she is still to face plenty of political ones. Chancellor Merkel has the difficult job of pleasing voters back home at a time when a slowing economy could affect job security and consumer confidence and fulfilling international commitments to smaller, weaker nations in the EMU.
Some have started to pontificate on the idea that perhaps better than eject Greece from the euro-region better than Germany leave, while this would certainly weaken the union it would also leave them with a much weaker common currency; a formidable tool. While this is extremely unlikely to happen it does make a certain amount of theoretical sense. In any event, with neither Greece or Germany going anywhere in the immediate future and a quick and clean resolution to the debt crisis looking impossible traders have come to terms that this saga still has plenty of room to play out. As things continue to sour in the euro-area we expect to see some of the international support, most notably from China, start to evaporate. For major players who need abundant liquidity the euro had seemed a worthy alternative to the greenback as US economic growth floundered, however, now that the debt crisis just wont go away the buck is likely to come back into favour as the lesser of the two evils.
In line with this global macro fundamental outlook we favour further declines in the euro toward 1.3000 and then on to 1.2000 in coming weeks and months. With the greenback already coming back into favour after the franc was effectively neutered by the SNB as a safe haven play it is well positioned to capitalize on the euro’s demise also and accelerate its gains.
Intraday the euro caught a light bid as expectations of much bigger drops were circulating in the market proved unfounded. The euro was also in a modestly bid mood as a classic short squeeze played out this morning in Europe after various reports, most notably a Greek referendum to leave the euro and large corporate withdrawals from French banks, were denied.
Reaffirming our aforementioned bearish outlook for the euro, however, is this longer term chart which clearly shows the euro in the process of carving out a third lower top after posting a lower low back in mid-2010 which is keeping the pressure on the downside. Those 2010 lows remain the downside target, just below 1.2000, over coming weeks and months as we expect the crisis in the euro-region to sour further and the buck to be the outsize winner. For a full technical outlook.
Written by Jonathan Granby, DailyFX Research Team
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.