Will Weakened Germany Sink the Euro?

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Market Drivers for March 28, 2013
Cyprus banks reopen but capital controls keep lines to min
German unemployment rises for 1st time since Oct driving euro back to 2750
Europe -0.22% Nikkei -1.26%
Oil $96.50/bbl
Gold $1605/oz.

Europe and Asia:
AUD TD Securities Inflation 0.2% vs. 0.0%
AUD Private Sector Credit 0.2% vs. 0.3%
JPY Retail Trades -2.3% vs. 0.9%
EUR German Unemployment Change 13K vs. -2K
EUR German Retail Sales 0.4% vs. -0.5%

North America:
USD GDP 8:30
USD Personal Consumption 8:30
USD Initial Jobless Claims 8:30
CAD GDP 8:30

The EURUSD came under renewed selling pressure in morning European dealing today after German unemployment data revealed the first increase in joblessness since October. German unemployment rose by 13K versus -2K forecast sending tremors through the market on first evidence that the Eurozone’s largest and most important economy may not be immune to the economic slowdown that is affecting the rest of the region.

Unemployment was unchanged in February, according to the Federal Labor Agency said. It had previously reported a decline of 3,000. The unemployment rate remained at 6.9%. Overall labor conditions in Germany are markedly better than in the rest of the region especially the periphery economies of southern Europe. However today’s data was the first uptick in joblessness in more than five months and taken together with the sharp declines in flash PMI readings, it suggests that the economic slowdown may be spreading to Germany as well.

As we have been noting over the past several weeks, the slowdown in German activity is far more important and potentially more damaging to the health of the euro than the series of financial crises that have erupted in periphery economies. Germany is the bellwether of Europe and its primary driver of growth. If it suddenly sees a slowdown in demand the impact on EUR/USD is likely to be negative with the pair drifting to fresh lows over the next several weeks.

The surprisingly negative news on the labor front was partly offset by the better than expected German Retail Sales which printed at 0.4% versus -0.5% eyed. This was the second consecutive month of upward surprises and showed that consumer demand in Germany remains buoyant despite turmoil elsewhere in the Eurozone. However, Retail Sales dropped by -2.2% on a year over year basis indicating that overall spending remains cautious.

In Cyprus today the banks reopened, but given the imposition of strict capital controls, the lines were very modest as most depositors were unable to withdraw significant sums of money. For the time being the Cyprus crisis appears to have calmed, but the greater question is whether it will have negative repercussions elsewhere in the Eurozone, most specifically in Italy where the resentment towards the EMU continued to build.

With Easter holiday approaching and much of Europe and Asia closed tomorrow, trading may begin to slow to a crawl as the day proceeds. The EURUSD so far has been able to hold the 1.2750 level, but if that barrier is breached in North American trade than the pair could quickly test the 1.2700 figure as momentum selling accelerates.

Boris Schlossberg
Managing Director

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