Morning Commentary: New Math

Foreign Exchange - Morning Commentary

New Math

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Traditional economic analysis would indicate that when an economy weakens and interest rates fall, the exchange rate usually weakens. There is not always a direct correlation between these economic factors, but for the most part, they work as part of the built-in stabilizers for an economy. Today is not a day in which economic math is working. Very weak EZ economic data has led to lower EZ interest rates today, but the euro has bounced off of its lows to be nearly unchanged.
 
Germany is the economic locomotive for the EZ. Germany’s economy is heavily dependent upon exports, and with China and other key economies slowing, demand for German exports is declining; add in the mix of increasing trade tensions and the travails of the German car industry and it creates a formula for very weak economic growth bordering on recession with forecasts for German growth in Q3 at 0.1%.
 
German preliminary Manufacturing PMI fell from 45.0 to 43.1, which was way below expectations, and has taken the index to its lowest point in seven years. France also reported sharply weaker PMI manufacturing data. A small silver lining in the PMI report was that the service sector of the economy for both Germany and France, while still weakening, held up well to help offset the sharp weakness in manufacturing.
 
German 10-year yields are down for the sixth day in a row and are approaching all time historical lows of -0.41%. The euro weakened on the news but has bounced back into the middle of the overnight range. The ECB meets tomorrow and that might explain why the euro is nearly unchanged as investors and traders await the outcome of that meeting. Market expectations are tilted toward further monetary easing by the ECB.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • Australia preliminary PMI readings were very weak. The composite index fell from 52.5 to 51.8 with both manufacturing and services slumping. The next Reserve Bank of Australia meeting is on August 6 with a 21% probability of another rate cut following back-to-back rate cuts in June and July. The Aussie dollar is the weakest of the major currencies today.
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