Monthly Archives: June 2005

ECB: Just Look At This!

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I had promised a quiet day. I may have to eat my words. Look at this on the euro, and remember my post yesterday.

The currency also weakened after Germany’s Stern magazine reported German Finance Minister Hans Eichel and Bundesbank President Axel Weber discussed a possible failure of European monetary union. The euro is off to its worst start of a year since 2001, down 9.3 percent compared with the dollar.

“This is extremely bad timing and has undoubtedly compounded euro selling,” said Monica Fan, head of global foreign-exchange research at RBC Capital Markets Ltd. in London.

The euro retreated from as high as $1.2341 after the magazine said Eichel and Weber, who represents Germany on the ECB’s policy committee, discussed the euro’s potential failure with economists. The magazine quoted Joachim Fels, chief fixed- income economist at Morgan Stanley, who took part in the meeting. Fels declined to comment.

“We can neither confirm nor deny” that a meeting took place, said Bundesbank spokesman Wolf-Ruediger Bengs in a telephone interview. “We hope to issue a statement shortly.”

This is incredible stuff, and that it is breaking in the press must also be indicative of something. I go back to my post last week. It seems what I suggested is right: the ECB is deeply divided, and this ‘quietism’ and the policy of twirp is causing alarm in two important economies (Germany and Italy). This is not the end of the euro, but this discussion could mark the begining of the end. It all depends on how rapidly events unfold, and how long ‘ostrichism’ prevails in Frankfurt and Brussels.

Postscript: I am following the evolution of the Euro/USD over at our other page: A Few Euros More.

The Calm Before The Storm

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Following the turbulent river of news which has flowed unrelentingly through the principal European media outlets since Sunday night, today we seem to be swimming in a relative ocean of calm. This is very deceptive. Today the Netherlands is voting and tomorrow the ECB will have a closely watched meeting which may potentially have significant consequences for the EU economy.

If at this stage there seems little doubt about the outcome of the Dutch vote (more worthy of interest will be the level of participation and the size of the ‘no’ majority), we are also unlikely to see anything earth shattering happening over at the ECB. It is unlikely that there will be any change in the Central Bank’s two per cent interest rate policy (or twirp, as some wit at Morgan Stanley has christened it, after the rather better known zero rate (or zirp) policy at the Bank of Japan). All the watching eyes inevitably be focussed on the press conference, and on Trichet’s handling of the inevitable questions (worth a look at the 2:30pm webcast).

So if today we are enjoying a ‘day of reflection’, tomorrow we will undoubtedly see battle rejoined. In particular, it will be ‘D’ – or decision – day for Barroso and the EU Commission.
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EU Manufacturing Declines

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And significantly. It will be worth looking at the US data this afternoon, but the trend is clear, off-shoring is, if anything, picking up speed.

Manufacturing in the dozen euro nations in May shrank the most in almost two years as unemployment near a five-year high and oil prices around $50 a barrel add to concerns about the outlook for expansion this year.

An index based on a survey of about 3,000 purchasing managers compiled by NTC Research Ltd. for Reuters Group Plc fell to 48.7, the lowest since July 2003, from 49.2 in April, according to figures available on the Internet today. Economists had expected a reading of 49.2, according to the median of 30 estimates in a Bloomberg survey.

Euro Still Dropping

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Having just posted on Afoe suggesting I expect a quieter day, I have just noticed this:

“The euro fell against the dollar after the manufacturing report. The European single currency traded at $1.2285 at 10:15 a.m. in Frankfurt, down from $1.2304 late yesterday in New York, according to electronic foreign-exchange dealing system EBS.”

Still this fits in with the general picture I described, every piece of bad news can drive down euro/USD. In this case it was the manufacturing survey. I suppose, taking this a step at a time, the question is how long it needs before we break below $1.20, at this rate, and if we get a bad enough day tomorrow, we can be getting near by the end of the week. Maybe this depends on the US jobs data on Friday. I should write a post entitled eurozone/USA: the great race to the bottom (remember most US commentators are expecting a further dollar decline associated with the current account deficit).

I agree with an earlier commentator (and MS’s Stephen Yen: parity by year’s end would be OK from the European end (although not in Washington). The thing is, by years end, right now what we need is someone to reach for the handbreak.

Update: It reach $1.2257 at 10:30 a.m. in London. In part this is a result of a story in Germany’s Stern magazine.

Update 2: 13:00 Washington post has this:

“The euro dropped to $1.2255 in European trading, also propelled downward by an unsourced report in the German weekly Stern that a possible failure of the monetary union was discussed at a meeting last week attended by Germany’s finance minister and central bank chief.”

Update 3 “The euro fell as low $1.2224 in European trading before climbing back to $1.2242, still down from $1.2312 in New York late Tuesday”.

German Retail Sales Down

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This is not surprising, but it is hard to see how the German economy is going to generate GDP and employment growth in 2005. Remember global trade is slowing gradually, so it is hard to see who you can rely on exports.

Retail sales in Germany, Europe’s largest economy, fell in April as unemployment held near a post- World War II record and consumer confidence slumped.

Sales, adjusted for inflation and seasonal swings, fell 3 percent from a year earlier, the Federal Statistics Office in Wiesbaden said today. Economists expected sales to be unchanged, the median of 13 forecasts in a Bloomberg survey showed. Sales in the first four months of the year fell 1 percent. The report did not give a seasonally adjusted comparison with the previous month.