Will Weak GDP Data Force EZ Into Currency War?

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Market Drivers Feb. 14, 2013
EZ Q4 GDP misses taking EUR/USD below 1.3400
NZ PMI helps push kiwi through 85.00
Nikkei -0.50% Europe -0.4%
Oil $97.24
Gold $1642/oz.

Europe and Asia:
JPY Prelim GDP -0.6% vs. -0.5%
NZD PMI 55.2 vs. 50.4
EUR Flash GDP -0.6% vs. -0.4%

North America:
Unemployment Claims 8:30

The Euro sank to fresh monthly lows in morning European dealing today in the wake of disappointing Q4 GDP growth that showed the region to be in the throes of a deep contraction. EZ GDP contracted by -0.6% versus -0.4% eyed as both core and periphery economies performed poorly in the last quarter of 2012.

The flash reading for Q4 French data printed at -0.3% versus -0.2% eyed while Q4 GDP data for Germany came in at -0.6% versus -0.5% expected. Germany’s fourth-quarter contraction was caused by declining exports as well as less company investment and construction, the statistics office said. Household and government spending increased slightly. More complete data will be released on February 22nd.

Part of the contraction in economic activity was no doubt due to the uncertainty surrounding the US budget situation in Q4 which may have delayed business investment activity. More recent economic data has suggested some pick up in demand. However, the weak results from Eurozone’s two core economies highlight the difficulties in growth in the overall region and suggest that a strong EUR/USD may make matters even more difficult in 2013 as both economies attempt to use exports to fuel growth.

The EUR/USD dropped through the key 1.3350 support and and may now target 1.3300 as the day proceeds. Yesterday the pair was quickly rejected at the 1.3500 level which now stands as a key resistance point. Over the past week the pair has lost much of it luster as the cold hard reality of sluggish EZ economic growth is beginning to sink into the market and the EUR/USD has continued to drift lower.

The sharp decline in the EUR/USD reflects two key concerns of the market. One, the less that expected growth in the region may revive the sovereign debt issue once again as lagging revenues will have trouble servicing the debt. Two, lower exchange rates will clearly be necessary as export growth wanes. This is especially true of Germany, which has clearly been taken aback by the recent weakening in yen.

Japan is one of Germany’s primary competitors in the capital goods market and the recent decline in yen will no doubt make German export growth more difficult thus affecting growth in all of the Eurozone. Up to now Germans have been staunch opponents of exchange rate adjustments, calling on Japan to cease its newly aggressive policy of devaluation. However given today’s disappointing results the pressure on Germany to engage in the “currency wars” will likely increase.

With little fresh eco data on the North American calendar except the weekly jobless claims, the FX markets are likely to focus on the weak EZ numbers as well as any policy comments regarding today’s GDP results from the G-20 which starts today. If the risk off flows continue in US session the EUR/USD could test support at 1.3300 as the day develops.

Boris Schlossberg
Managing Director

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