Euro Rebounds as ZEW Surprises - Dead Cat Bounce?

Last updated 4/21/2009 5:29 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Fed's Kohn - US economy may stabilize and recover by end of year
• ZEW better at 11.8 vs. -6.5 last
• Asian equities lower but Europe up on better than forecast Tesco earnigns
• Oil at $45/bbl
• Gold continues recovery to $891/oz.

Overnight Eco

• NZD Visitor Arrivals -0.5%
• AUD Monetary Policy Meeting Minutes
• EUR German PPI -0.7% vs-0.3% eyed
• GBP CPI -0.2% as expected
• GBP RPI -0.4% vs. -0.5% consensus
• EUR German ZEW Economic Sentiment
• EUR ZEW Economic Sentiment

Event Risk on Tap

• CAD Wholesale Sales expected at 1.1%
• CAD Rate Decision expected at 0.50%

Price Action

• USD/JPY test 9800 to the downside but bounces in tune with European equities
• AUD/USD remains above 7000 as equities in Europe firm
• GBP/USD above 1.4500 with CPI in line
• EUR/USD bounces to 1.2990 on better ZEW, but 1.3000 remains cap for now

The ZEW survey of investor expectations improved markedly in April jumping to 11.8 from -6.5 the month prior and helped lift the EUR/USD to session highs of 1.2990 in early European trade. Investors were encouraged by signs that the contraction in the 16 member union was beginning to flatten out and undoubtedly were influenced by the strong recovery in the equity markets in March.

Nevertheless, the current situation survey component declined to -91.6 from 89.4 the month earlier suggesting that the situation on the ground remains grim. We cannot help but believe that the ZEW results are more a function of wishful thinking rather than any concrete improvement in fundamentals. Earlier in the night German PPI data printed far colder than forecast at -0.7% vs. -0.3% eyed hinting at the possibility of deflation in the Eurozone.

A true measure of EZ economic activity will come out on Thursday night when the flash PMI readings will hit the screen. If the surveys remain mired near their multi year lows, any talk of EZ recovery will quickly evaporate. We continue to believe that for the time being any rally in the EUR/USD is simply a short covering spurt and any vision of an economic rebound in the region is just a mirage.

Meanwhile in UK today the inflation data came in line with expectations with CPI rising 0.2% but RPI registering a -0.4% year over year decline – its first since 1960. The news had virtually no impact on the pound, as inflation concerns are no longer a priority for the BOE with central bank far more focused on stimulating growth. After breaking 1.4500 in a flurry of stop running, cable rebounded aided by better equity market flows, but could easily retest that barrier if US equities turn down as the day proceeds.

The US economic calendar is once again barren and focus will remain on earnings with five Dow components reporting today. Yesterday’s selloff in equities may have marked a near term top for the Dow as the capital markets digest the massive rally of March. If US equities once again turn negative, the short covering rally of high beta currencies that we saw in the European session could unwind quickly.

ZEW Turns Positive

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.