This is the start of a series of articles covering economic and political events expected to happen during the week ahead which have the potential to make a significant impact on major foreign exchange rates. Some of the events will also affect equities and fixed income markets. Although the latter ones will not be the main focus of the articles, the possible effect on them could sometimes be examined also.
The articles will also include information on the large positions the futures traders are reported to have on the examined currencies or equity indices.
EUR/USD Currency Pair
After advancing with more than 2% for the last week, the euro declined a bit on Friday to finish at 1.2512. The sharp advance of the euro presented a nice opportunity for profit taking at the end of the week.
After meeting with German Chancellor Merkel, the Greek Prime Minister Samaras met with the French President Hollande during the weekend to discuss the next Greece loan tranche of €31.5 billion. A Bloomberg article from the weekend reveals details about the meeting with the most important ones being the firmer verbal support of France that Greece will stay in the euro zone. The same attitude was expressed by the German Chancellor on Sunday when she said the advocates of a Greek exit from the single currency should "weigh their words".
Those are only verbal arguments and it is about to be seen if the market has not become tired of being supported only verbally.
Any possible appreciation of the euro could be played by a long position in the CurrencyShares Euro Currency Trust (NYSEARCA:FXE) which is an ETF that tracks the EUR/USD currency rate and has an expense ratio of .40%. If one expects the euro to depreciate against the U.S. dollar a short position in the same ETF could be used.
Another option is to open positions in the DB USD Index Bullish (NYSEARCA:UUP) ETF or in the DB USD Index Bearish (NYSEARCA:UDN) fund. Both of those track the value of the USD against a basket of six other currencies and have an expense ratio of .50%.
Important economic data releases on Monday:
- Germany import price index (YoY) - 6:00 GMT / 1:00am EST
- Germany IFO leading indicators - 8:00 GMT / 3:00am EST
- ECB's member Jorg Asmussen speaks - 16:00 GMT / 11:00am EST
The consensus estimate (1.4%) of the Germany import price index is higher than the previous reading (1.3%). Any surprise on the upside would be negative at first for the euro as it would mean higher production costs and possibly elevated inflationary expectations in one of the strongest economies in Europe. The effect however on the market should not be very volatile as in general the increases in production costs would not always result in a higher inflation.
The "IFO expectations" indicator of the IFO group is the most interesting one as it shows business expectations for the next 6 months. The current reading of 95.6 is not supportive for an euro appreciation so any surprise of a reading above that value could sparkle a mini rally.
The ECB's member speech could present increased volatility depending on the words he would say. If the markets hear a new hint or a news about a further support of the euro from the central bank, this could lead to an euro appreciation.
Important economic data releases on Tuesday:
- Germany Gfk consumer confidence survey - 6:00 GMT / 1:00am EST
- EU M3 money supply (YoY) - 8:00 GMT / 3:00am EST
- USA consumer confidence - 14:00 GMT / 9:00am EST
While the consensus estimate for the Germany consumer confidence is slightly below the previous reading, the U.S. consumer confidence is expected to increase. Any negative deviation from the expectation for the U.S. value could lead to a further depreciation of the U.S. dollar.
The consensus estimate for the M3 money supply is a slight increase to 3.3%. Any bigger increase than this could be supportive for the euro in general.
Important economic data releases on Wednesday:
- Italy 10-y bond auction - N/A
- Germany Harmonized index of consumer prices (YoY) - 12:00 GMT / 7:00am EST
- USA Gross domestic product annualized (Q2) - 12:30 GMT / 7:30am EST
- USA Pending home sales (MOM) - 14:00 GMT / 9:00am EST
- USA FED's beige book - 18:00 GMT / 1:00pm EST
The Italian bond auction will show if the markets are buying the words of the European officials. Any further decline of the yield would be supportive for the euro while an yield increase would weight on the single currency.
The harmonized index of consumer prices shows the inflation reading in Germany. Any reading above the consensus of 2.1% could support the euro and vise versa.
The consensus estimate for the U.S. GDP is 1.6%. Any significant deviation from this value would drive the U.S. dollar in the same direction as the deviation.
The pending home sales are expected to increase with 1% so if they do not, this would weight on the USD.
The FED's beige book shows the current picture of the U.S. economy so it could give important further clues about possible future policy actions of FED, including monetary easing programs. The book could serve as an information tool to FOMC members on their next meeting around the middle of September.
Important economic data releases on Thursday:
- Germany Unemployment change (Aug) - 7:55 GMT / 2:55am EST
- EU Consumer confidence (Aug) - 9:00 GMT / 4:00am EST
- EU Economic sentiment indicator (Aug) - 9:00 GMT / 4:00am EST
- USA Jobless claims - 12:30 GMT / 7:30am EST
- USA Core personal consumption expenditures (YoY) - 12:30 GMT / 7:30am EST
- USA Personal income and spending - 12:30 GMT / 7:30am EST
The unemployment change in Germany affects the personal spending in the country and thus it affects the country's growth. Any value above the consensus estimate of 7K would weight on the euro.
The EU consumer confidence together with the economic sentiment indicator show the consumers confidence in the economic activity. If consumers are seeing a better future they would spend and invest more which in turn would increase the economic activity. The consensus estimate for the sentiment indicator (87.5) is a bit below the previous reading of 87.9. Any surprise above the estimate would have the potential to drive the euro price higher.
The U.S. initial jobless claims are expected to decline a bit so any negative surprise would weight on the U.S. dollar and support the euro. The value of continuing jobless claims should also be watched. Its previous reading was 3.317M.
The U.S. core personal consumption expenditures serve as an important indicator of inflation so any high reading would be supportive for the U.S. dollar. The current estimate is 1.7% while the previous reading was 1.8%.
Important economic data releases on Friday:
- Germany Retail sales (YoY) (Jul) - 6:00 GMT / 1:00am EST
- EU Consumer price index (YoY) (Aug) - 9:00 GMT / 4:00am EST
- EU Unemployment rate (Jul) - 9:30 GMT / 4:30am EST
- USA Chicago PMI (Aug) - 13:45 GMT / 8:45am EST
- USA Reuters/Michigan Consumer sentiment index - 13:55 GMT / 8:55am EST
- USA Factory orders (Jul) - 14:00 GMT / 9:00am EST
- USA FED's Bernanke speech - N/A
Germany retail sales could be used as an indicator for consumer spending. As such a higher reading would be supportive for the euro. The current consensus estimate is at 0.1% so any upside surprise could lead to increase in the euro value.
The EU consumer price index measures the inflation in Europe. A higher reading than the consensus estimate of 2.5% could mean the ECB would be forced to refrain from an increase of the monetary easing. On theory this should support the euro but in the current situation it would also mean the support the ECB has promised to supply to the markets could be limited. This could be a bad signal and weight on the euro, at least in short term.
The U.S. economic data to be released on Friday is mostly concerned with the overall business situation in the country. Currently the consensus on the consumer sentiment index and the factory orders is that the values will be higher than the previous readings. Any negative surprise on those would be bearish for the U.S. dollar. The Chicago PMI index is expected to be slightly lower than the July reading (53.5 compared to 53.7). A value above 50 is considered bullish for the USD but any negative surprise to the estimate would have the potential to drive the U.S. currency value down.
The last event for the week and the month is the FED's Chairman Ben Bernanke speech. It could have significant impact on the EURUSD currency pair given the language and the words he uses. Any hint for a further monetary accommodation would increase the euro value against the U.S. dollar. Mr. Bernanke's speech could reveal the FED's current views on the U.S. economy and the policies it intends to undertake or stick to, so it could have a long term impact on the markets.
Futures traders positions
The U.S. commodity futures trading commission reported last week that the net short positions of noncommercial traders (those are traders that do not use futures in hedging activities) decreased from about 180T to about 170T for a week. The net long positions increased from about 43T to close to 46T. The cumulative effect of this vanishing downward pressure on the euro was the increase it achieved during the week.
There is a noticeable trend of increasing the longs and decreasing the short positions for almost the last two months so the current appreciation of the euro might be not be so unsupported.
Concerning the week ahead one should not forget that those are positions as of Tuesday each week so it could be better to wait for the next release to make some more short-term conclusions.