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Trading News Report

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EUR/USD: Trading the Euro−Zone Sentix Investor Confidence Survey

Mon, Mar 9 2009, 06:42 GMT
by Daily FX Research Team

DailyFX

Deteriorating fundamentals paired with increased turmoil in the banking sector is likely to weigh on European investors, and a drop in the Sentix indicator could stoke increased selling pressures for the single-currency as the outlook for future growth turns increasingly bleak.

Trading the News: Euro-Zone Sentix Investor Confidence Survey

What’s Expected

Time of release: 03/09/2009 09:30 GMT, 05:30 EST

Primary Pair Impact : EURUSD

Expected: --

Previous: -36.1K

Impact the Sentix report had on EURUSD through the last 2 months

February 2009 Euro-Zone Sentix Investor Confidence

Investor confidence in the Euro-Zone weakened further in February as the Sentix indicator slipped to -36.1 from -34.4 in the previous month. A deeper look into the report showed current business conditions fell to -52.25 from -37.25, which is the lowest reading since records began in 2003, while a gauge for future expectations rose for the third consecutive month to -18.25 from -31.50 in January. The data continues to reflect the dire state of the economy however, the rise in expectations suggests that investors are raising their outlook for future growth as a result of the extraordinary efforts taken on by policy makers around the globe. Despite the improved outlook, investors are likely to face increased headwinds over the coming months as turmoil in the banking sector intensifies, which should weigh on the markets as the global economy faces its worst financial crisis since the 1940’s.

January 2009 Euro-Zone Sentix Investor Confidence

The Euro-Zone Sentix investor confidence survey snapped back after falling for the past seven-months as the index jumped to -34.4 from record low reading of -42.3 in January. Meanwhile, the breakdown of the report showed that the gauge for future expectations rose to -31.5 from -42.0 in the previous month, but as the index remains deep in negative territory, the probability for a rebound in business investments remains unlikely. Nevertheless, increased efforts by European policy makers to stimulate the economy has certainly helped to boost sentiment throughout the region, but despite the rise in the survey, the outlook for growth remains bleak as the European Central Bank forecasts the annual rate of growth to contract 0.5% this year.

What To Look For Before The Release

Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

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

Deteriorating fundamentals paired with increased turmoil in the banking sector is likely to weigh on European investors, and a drop in the Sentix indicator could stoke increased selling pressures for the single-currency as the outlook for future growth turns increasingly bleak. The economic slump in Central and Eastern Europe has certainly raised the downside risks for the euro-region, and as the European Union fails to allocate resources to stem fears of a deepening downturn, investors are likely to cut their growth forecasts as the economy is projected to face its worst recession since World War II. The preliminary GDP reading for the euro-region showed that the economy contracted 1.5% in the fourth quarter, which was the biggest drop since recordkeeping began in 1995, while the annual rate of growth slipped to -1.3% from an initial estimate of -1.2% to mark its first full-year contraction. In addition, economic confidence in the region slipped to a record low in February while the jobless rate pushed to a two-year high in January, and conditions are likely to get worse throughout the year as the economy faces a deepening recession. Meanwhile, after lowering the benchmark interest rate by 50bp to a record-low of 1.50%, the European Central Bank is expected to lower borrowing costs further as they forecast the annual rate of growth to contract between 2.2%-3.2% this year, but President Trichet remained reluctant to over shoot the interest rate even as he expect price growth to ‘remain well below 2% in 2009 and 2010.’ The comments by the central bank head suggests that the recent actions taken on by policy makers will suffice to shore up the economy going forward however, as market participants perceive that the ECB continues to undermine the potential of the global crisis and remains well behind in the yield curve, expectations for further easing by the European policy makers is likely to weigh on the exchange rate going forward. Moreover, as risk sentiment continues to dictate price action in the currency market, the U.S. dollar is likely to hold its bullish trend against the euro over the near-term as the reserve currency continues to benefit from safe-haven flows.

Trading the given event risk may not be as clear cut as some of our other trade but nevertheless, a rise in confidence could spur a rise in the euro. Therefore, if the Sentix survey rises to -30 or higher, we will look for a green, five-minute candle following the release to confirm a buy entry on two lots of EURUSD. Once these conditions are met, we will set our initial stop at the nearby swing low (or reasonable distance taking volatility into account), and this risk will determine our first target. Our second target will be based on purely on discretion, and in and effort to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.

Conversely, a drop in investor confidence is likely to weigh on the euro, and would lead us to short the euro-dollar. Therefore, if the survey falls further into negative territory or reaches the record-low reading of -42.3 seen in January, we will look to sell the single-currency, and will follow the same strategy for a short trade as the long position mentioned above, just in reverse.

Published on  Mon, Mar 9 2009, 06:50 GMT