EUR/USD: Trading The German ZEW Survey Report

Trading the News: German ZEW Survey (Econ. Sentiment)

What's Expected

Time of release: 02/17/2009 10:00 GMT, 05:00 EST

Primary Pair Impact : EURUSD

Expected: -25.0%

Previous: -31.0%

Effect the German ZEW Survey report had over EURUSD for the past 2 months

January 2009 German ZEW Survey

Investor confidence in Germany rose more than expected as the ZEW survey for future expectations surged to -31.0 from -45.2 in December amid forecasts for a rise to -43.1. The extraordinary efforts taken on by the European Central Bank and the second-round of fiscal stimulus offered by Chancellor Angela Merkel has certainly helped to taper the downside risks for growth in the economy, but as the European Commission forecasts economic activity to contract 2.3% this year, the outlook for future growth remains bleak. Moreover, as trade conditions continue to deteriorate, fears that the region may face its worst recession since World War II could lead the ECB to ease policy further over the coming months to avoid deep and prolonged downturn in the economy, and is likely to hold borrowing costs at a lower rate throughout the foreseeable future as policy makers try to restore confidence in the financial markets.

December 2008 German ZEW Survey

The German ZEW confidence survey unexpectedly improved in December as the gauge for future expectations increased to -45.2 from -53.5 in the previous, which suggests that investors are holding an improved outlook for growth as the government plans to spending EUR 32B to stimulate the ailing economy. Nevertheless, as the Bundesbank expects the economic activity to weaken further in the fourth quarter and projects the annual rate of growth to contract 0.8% in 2009, the outlook for Europe's largest economy remains bleak as global trade conditions falter. As a result, the European Central Bank is widely anticipated to continue its easing cycle next year as economic activity deteriorate throughout the region, and may adopt a zero interest rate policy over the near-term in an effort to steer the economy out of a recession.

What To Look For Before The Release

Bullish Scenario:

If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on EURUSD ahead of the data release.

Bearish Scenario:

If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on EURUSD ahead of the data release.

How To Trade This Event Risk

Investor confidence in Germany is expected to improve for the fourth consecutive month as economists forecast the ZEW survey to rise to -25.0 from -31.0 in January, but as the International Monetary Fund projects a global recession in 2009, the odds for a marked recovery in sentiment remains unlikely. The advanced GDP reading for Europe's largest economy showed that economic activity dropped 2.1% in the fourth quarter, which is the biggest decline since 1987, and lowered the annual rate of growth to -1.7% from a revised reading of 1.4% in the third quarter. The data foreshadows a deepening recession throughout the region as market participants expect the country to face its worst economic downturn since World War II, and the outlook for future growth remains bleak as trade conditions deteriorate at a record pace. Stagnating demands from the global economy lowered the trade surplus to 6.9B from a revised reading of 9.9B in the previous month as exports fell another 3.7% following the record drop in November, while industrial outputs plunged 4.6% in December, marking its biggest monthly decline in 18-years. In addition, factory orders extended its worst slump on record as demands slipped another 6.9% during the same period after dropping 5.3% in November, and the lack of improvement in fundamentals reinforces a dour outlook for the economy. As growth and inflation falter, the European Central Bank is widely expected to lower the benchmark interest further next month as price growths falls below the central bank's 2% target, and is likely to hold rates at the lower level for some time in an effort to steer the economy out of a recession. After leaving rates on hold during this month's meeting, ECB President Trichet explicitly stated that there is a chance for a 50bp rate cut next month, but went on to say that adopting a zero interest rate policy for the 16 economies operating under the euro is not 'appropriate at this stage.' Moreover, a Bloomberg News survey is already showing that 24 of the 29 economists polled expect the ECB to lower borrowing costs by another 50bp to 1.50%, and as a result, expectations for a rate cut is likely to weigh on the single-currency over the near-term. Furthermore, as the central bank is also anticipated to revise their growth and inflation forecasts for the year in March, signs of a deepening downturn in the region would certainly reinforce expectations for further easing, which would only reinforce a bearish outlook for the euro going forward.

Expectations for another rise in investor sentiment clearly favors a bullish euro trade for the given event risk, and an in-line print or a survey reading above -25.0 would certainly set the stage a long euro trade following the release. As a result, we will look for green, five-minute candle following the event to confirm a buy entry on two lots of EURUSD, and once these conditions are met, we will place our initial stop at the nearby swing low (or reasonable distance) and this risk will determine our first target. Our second target will be based on our discretion, and to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.

Nevertheless, the downturn in global trade paired with instability across the financial markets continues to indicate a worsening outlook for the economy, and as market participants expect economic activity to deteriorate further, investors may lower their outlook for future growth as fears of a deepening downturn intensify. Therefore, a dismal confidence reading (-35.0 or lower) would set the stage for a bearish euro trade for the event, and we will follow the same setup for the short position as the long trade listed above, just in reverse