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EUR/USD: Trading the German ZEW Investor Confidence Survey

Mon, Mar 16 2009, 06:02 GMT
by Daily FX Research Team

DailyFX

The German ZEW investor confidence survey is expected to fall to -6.5 in March from -5.8% in the previous month as market participants expect Europe’s largest economy to face its worst recession since World War II, and the outlook for growth and inflation remains bleak as the European Union fails to allocate resources to stem the economic slump in Central and Eastern Europe.

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

What’s Expected

Time of release: 03/17/2009 10:00 GMT, 06:00 EST

Primary Pair Impact : EURUSD

Expected: -6.5

Previous: -5.8

Effect the ZEW survey had over EURUSD for the past 2 months

February 2009 German ZEW Survey

The German ZEW investor confidence survey rose to -5.8 from -31 in January, marking the biggest jump in sentiment since July 1993, as Chancellor Angela Merkel plans to spend nearly EUR 80B to stimulate the ailing economy. Meanwhile, the gauge for current conditions slipped to a five-year low of -86.2 from -77.1 in the previous month, which suggests that investors are rising their outlook for future growth as policy makers employ all of their available tools to steer the economy out of a deepening recession. Despite the unprecedented steps taken on by the government, activity in the global economy remains weak, and as trade conditions falter, the outlook for growth and inflation remains bleak. As a result, the ECB is expected to ease policy further in an effort to shore up the economy, and may adopt unconventional policy tools in the months ahead as the benchmark interest rate draws close to zero.

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.

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

The German ZEW investor confidence survey is expected to fall to -6.5 in March from -5.8% in the previous month as market participants expect Europe’s largest economy to face its worst recession since World War II, and the outlook for growth and inflation remains bleak as the European Union fails to allocate resources to stem the economic slump in Central and Eastern Europe. The final GDP reading for the region showed that the economy contracted 2.1% in the fourth quarter, which was the largest drop since 1987, as exports plunged 7.2% during the period and conditions are likely to get worse as trade conditions falter. Industrial outputs tumbled 7.5% in January, which is the biggest drop since recordkeeping began in 1991, and as business confidence remains at a 26-year low, firms may continue to cut back on production and employment as demands from home and aboard deteriorate. A report by the Federal Statistics Office showed that retail sales in Germany unexpected declined 0.6% in January, which lowered the annualized figure to -1.3% from a revised reading of 0.4% in the previous month, and the data continues to reinforces a dour outlook for private-spending as households face a weakening labor market. Moreover, a separate report by the Federal Labor Agency showed that the jobless rate pushed higher for the fourth consecutive month in February as 40.0K additional workers filed for unemployment, which raised the annual rate to 7.9% from 7.8%, and foreshadows a weakening outlook for the Euro-Zone as households and businesses remain pessimistic towards the economy. Meanwhile, as the European Central Bank expects GDP to contract between 2.2%-3.2% this year, and forecasts price growth to ‘remain well below 2% in 2009 and 2010,’ the central bank may opt for further easing in an effort to stimulate the ailing economy however, as ECB President Trichet remains reluctant to over shoot the interest rate, market participants have argued that the board has underestimated the potential impact of the global crisis, and remains well behind in the yield curve. As a result, fundamental headwinds are likely to weigh on the exchange rate going forward, and as investors continue to curb their appetite for risky assets, the euro is likely to face increased selling pressures against the greenback as the reserve currency continues to benefit from safe-haven flows.

At first glance, trading the given event risk may call for a bearish euro trade as economists expect investors to turn increasingly pessimistic towards the economy however, an unexpected rise in the ZEW survey would certainly set the stage for a long euro trade following the release. As a result, if the survey shows a rise in confidence, we will look for a 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 purely on discretion, and in order to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.

On the other hand, increased turmoil in the banking sector paired with fears of a deepening downturn in the global economy is likely to weigh on investors, and a drop in the survey would certainly set the stage for a bearish euro trade for the given event risk. Therefore, a drop to -6.5 or lower would lead us to sell the euro-dollar, and we will follow the same setup for the short trade as the long position listed above, just in reverse.

Published on  Mon, Mar 16 2009, 06:10 GMT