German Finance Minister Sends Euro Plummeting

Last updated 3/27/2009 6:50 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• UK GDP shows sharper contraction than forecast
• King warns on UK spending
• Equities mildly lower in Asia and Europe
• Oil at 53.86/bbl
• Gold drops to 933/oz.
• Steinbrueck warns of threat to Euro on spending

Overnight Eco

• NZD GDP bit better at -0.9% vs. -1.1% eyed
• NZD Trade Balance much better at 489M vs. 77M
• JPY Tokyo Core CPI 0.4% as expected
• JPY National Core CPI 0.0%
• JPY Retail Sales plinge -5.8% vs. -3.1% expected
• EUR German Import Prices
• EUR German Prelim CPI -0.5%
• GBP Current Account much worse at -7.6B
• GBP Final GDP -1.6% worse from -1.5%
• CHF KOF Economic Barometer -3.4% vs. -5.7%

Event Risk on Tap

• USD Core PCE Price Index expected at 0.1%
• USD Personal Spending expected at 0.3%
• USD Personal Income expected at -0.2%
• USD Revised UoM Consumer Sentiment expected at 56.6

Price Action

• USD/JPY trades all the way down to 9770 on end of fiscal year repatriation
• AUD/USD drops below 7000 as dollar strengthens
• GBP/USD woeful GDP figures keep ressure on streling at it hits 1.4325
• EUR/USD drops bellow 1.3400 as euro sold on FinMin comments

Currencies spent the last working day of the week in generally listless trade until comments by German Finance Minister Peer Steinbrueck roiled the market sending EUR/USD sharply lower in early morning Frankfurt session. Mr. Steinbreuk noted that euro was at risk if the EU's Stability and Growth Pact isn't taken seriously.

“Germany, as a member of the EU, has a massive interest in the credibility of the Stability and Growth Pact, which as you know is not taken so seriously by some," Steinbrueck said in a speech to parliament. "If it is not taken seriously, I am telling you, the euro will have trouble one day in terms of its own credibility and stability."

In contrast to US fiscal authorities, the Germans have been reluctant to increase spending in order to mitigate the economic consequence of the global recession with many analysts criticizing Europe's largest economy for being behind the curve. However, despite the massive contraction in German and European GDP, the social costs of the recession have not been nearly as damaging as those in the United States. While US unemployment rate has climbed 3% from its lows, the EZ rate has only increased by 1%. Furthermore, with EZ consumers enjoying full health coverage and generous unemployment benefits, the authorities in the region are not nearly as desperate to revive their economy as their American counterparts which face the prospect of severe social dislocation for the millions of US unemployed.

Little wonder then that the German policy makers would stress their aversion to assuming more debt, rather than focus on stimulating their economy at any cost. Mr. Steinbreuck’s comments reflect the fundamental difference between the euro and the dollar, with the former deriving most of its strength from the EZ superior balance sheet structure, while the later trading off of US's more dynamic and flexible economic system.

Therefore, the collapse in the euro today reflects Mr. Steinbreuk’s concerns over its loss of status as a superior store of value to the greenback. He essentially argued that if the Europeans follow the Americans in debasing their currency, the euro will lose much of its attractiveness since it cannot compete against US on growth dynamics alone.

The knee jerk reaction by the market took the pair through the 1.3400 handle before bargain hunters and short covering kicked in. With so much technical damage already done the EUR/USD will likely consolidate for the rest of the session with 1.3500 now acting as resistance rather than support. Despite much heated rhetoric from both sides of the Atlantic the fundamentals for the pair have not changed this week and as such we continue to believe that the pair will bounce within the 1.3000-1.3500 band for the time being as market tries to get clarity on the prospects for global growth in Q2.

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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.