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EUR/USD: Trading the Change in the German Unemployment Report

Tue, Mar 31 2009, 05:47 GMT
by Daily FX Research Team

DailyFX

The German labor market is expected to weaken for the fifth consecutive month as economists forecast unemployment to rise another 52K in March, and conditions are likely to get worse throughout the first half of the year as Europe’s largest economy faces its worst recession in more than half a century.

Trading the News: German Unemployment Change

What’s Expected

Time of release: 03/31/2009 07:55 GMT, 03:55 EST

Primary Pair Impact : EURUSD

Expected: 52K

Previous: 40K

Impact the German Unemployment Change has had on EURUSD over the last 2 months

February 2009 German Unemployment Change

The German labor market weakened for the fourth consecutive month in February as unemployment increased 40K to 3.31M.
The data foreshadows a deepening recession throughout the region, and the outlook for growth and inflation remains bleak as trade conditions falter. Fading demands from home and abroad has certainly taken a toll on businesses throughout the fourth quarter, and firms may continue to cut back on production and employment as the downturn in the global economy intensifies. Meanwhile, the International Monetary Fund said that they expect Germany to contract 2.5% in 2009, which would be the biggest drop in growth since World War II, and as a result, the European Central Bank is widely expected to lower the benchmark interest rate by 50bp in March to a record-low of 1.50% after holding rates steady this month as policy makers attempt to stimulate the ailing economy.

January 2009 German Unemployment Change

German unemployment surged 56K to 3.27M in January, which raised the jobless rate to 7.8% from 7.7% in the previous month, and conditions are likely to get worse as the government expects the annual rate of growth to contract 2.25% this year. Despite the weakening outlook for Germany, Chancellor Angela Merkel said that Europe’s largest economy is ‘fundamentally strong,’ and remains hopeful that economic activity will recover by the second-half of the year as the government provides a second-round of fiscal stimulus to jump-start the economy. Moreover, the European Central Bank is expected to ease policy further next month as the outlook for growth and inflation falter however, as President Trichet remains reluctant to overshoot the interest rate, he said that the next ‘important’ board meeting will be in March, which suggests that policy makers may keep rates on hold in February as they continue to weigh the risks for long-term stability.

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 labor market is expected to weaken for the fifth consecutive month as economists forecast unemployment to rise another 52K in March, and conditions are likely to get worse throughout the first half of the year as Europe’s largest economy faces its worst recession in more than half a century. The final GDP reading for the region showed that the annual rate of growth contracted 2.1% in the fourth quarter, which was the largest drop since 1987, as exports plunged 7.2% during the period, and the outlook for growth and inflation remains bleak as trade conditions falter. Industrial outputs tumbled 7.5% in January, which is the biggest drop since recordkeeping began in 1991, while factory orders plunged 38% from the previous year to mark the biggest decline since recordkeeping began in 1991 as foreign demands plunged 4.4% during the same period. Moreover, the IFO business confidence survey fell to 82.1 from 82.6 in February, which is the lowest reading since the series began in 1982, while retail spending unexpectedly dropped 0.6% in January, and firms are likely to turn increasingly pessimistic towards the economy as demands from home and abroad falter. Meanwhile, as the European Central Bank forecasts economic activity within the euro-region to contract between 2.2%-3.2% this year and projects price growth to ‘remain well below 2% in 2009 and 2010,’ fears of a deepening recession has raised bets for a 50bp rate cut to a record-low of 1.00% this week as growth and inflation falter however, as President Trichet continues to emphasize his reluctance to overshoot the interest rate and expects the economy to recover in the second-half, the optimistic outlook held by the central bank head could drag on the outlook for long-term stability as market participants argue that the ECB continues to underestimate the depth of the economic crisis in the global economy. Nevertheless, a Bloomberg News survey shows that 49 of the 55 economists polled forecast the central bank to lower borrowing costs by another 50bp on Wednesday as price pressures deteriorate, fundamental headwinds paired with fading demands for higher-yielding assets are likely to weigh on the exchange rate over the week.

Trading the given event risk clearly favors a bearish outlook for the single-currency as the jobless rate in Germany is anticipated to push higher however, an enhanced labor report would certainly set the stage for a long euro-dollar trade following the release. Therefore, if unemployment rises 30K or less in March, we will look for a green, five-minute candle following the release to generate a buy entry on two-lots of EUR/USD. Once this conditions are met, we will place 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 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.

Conversely, as businesses continue to cut back on spending and production in response to the downturn in the global economy, weakening trade conditions paired with fears of a deepening recession could lead firms to slash their labor force as economic activity in the region deteriorates at a record pace. As a result, an in-line print or a rise of more than 52K in unemployment would lead us to short the euro, and we will follow the same strategy for a short euro-dollar trade as the long position listed above, just in reverse.

Published on  Tue, Mar 31 2009, 05:54 GMT