German Productivity Could Be the Key to EUR Strength

The EUR’s downward slide has come to a halt. Strong ZEW consumer-confidence numbers out of Germany, and positive European Central Bank (ECB) rhetoric, boosted the single currency versus the USD. The preliminary purchasing managers’ index (PMI) data compiled by Markit due for release on November 20 can further aid the EUR if Germany continues to expand as expected. French and overall European PMIs are expected to be close to previous readings. French manufacturing and services will likely continue to contract, but they could be doing so at a lower rate. European averages will be helped by German numbers, but dragged down by southern nation underperformance.

In general, manufacturing PMIs are surveys posed to managers that answer questions regarding employment, production, new orders, prices, supplier deliveries and inventories. The size of the sample varies on the region, the organization administering the survey, and if it’s an advanced (flash) or the final tally of participating managers’ answers.

German confidence measured by the ZEW Center in Manheim saw a jump from –3.6 to 11.5 following third-quarter gross domestic product (GDP) in Germany. The ZEW reading easily beat expectations (0.5 – 0.9) that were lower after the negative number from a month ago. German GDP data in the third quarter was enough to ensure the eurozone’s biggest economy narrowly avoided falling into a technical recession by printing a 0.1% growth after a disappointing second quarter. The ZEW looks ahead six months in order to gauge investor confidence, so the improvements in the third quarter created optimism concerning the year-end and early 2015.

Draghi’s Biggest Task

EUR/USD got a lift thanks to the combination of strong economic data and forecasts of out Germany, and the ECB’s possible expansion of its stimulus plans. Sovereign debt is a touchy subject across the eurozone though it is the most effective tool in a central bank’s arsenal. But given the disparity between member states’ economies such as Germany and Greece, there is significant resistance from cash-rich countries to along with it.

ECB head Mario Draghi and his colleagues are under much pressure to “do something” to kick-start the weak eurozone economy. Deep interest rate cuts haven’t had much effect, so the ECB has purchased covered bonds and asset-backed securities. So far, these securities have been restricted to the private sector, but the ECB could expand these purchases to government bonds.

What Will Sway Germany?

Speaking before a European parliamentary committee on Monday, Draghi said that further stimulus measures could include government bonds. If the ECB does move forward with quantitative easing (QE), we could see the wobbly euro lose more ground. The problem for the ECB is that unless the German economy is in dire straits, it will be hard to convince Chancellor Angela Merkel and the Bundesbank that the austerity that they preach is not the answer for the rest of Europe, and that they will need to fund a bailout of countries that could not reform their outdated economies.

The flash PMIs released tomorrow will give investors insight into what to expect with respect to QE, as the ECB and Germany continue to be far apart regarding its use. As more member countries start to fall behind, the European Union and the ECB will lean on Germany to change tack. But it remains to be seen if the longest-serving leader since the introduction of the euro can be persuaded to see things differently.