A Period Of Indigestion For The Euro

BCA Research’s European Investment Strategy & Foreign Exchange Strategy services conclude that for the next one-to-three months, European data could continue to underwhelm US variables, which will weigh on the euro.

The euro has been giving back recent gains, despite the upbeat economic performance of the Eurozone. One of the most reliable trackers for the euro’s performance of late is the ZEW sentiment index. It surveys over 300 experts from banks, insurance companies, and financial departments of select corporations on the outlook for financial markets. Despite an increase in the Growth Expectations component to a one-year high of 29.7 in February, the euro collapsed, creating a rare divergence.

Part of the reason could be noise. Financial variables rarely track economic indicators tick for tick. It is also true that while European economic data has been robust, it has lagged recent US releases. For example, the German manufacturing PMI has significantly underperformed that of the US. To the extent that these indicators track the relative economic strength between Europe and the US, this development would warrant a weaker euro in the interim. It is also true that economic surprises in the euro area are falling very fast relative to the US. This has typically led to euro weakness.

Chinese economic data has been encouraging of late, but weak spots remain. For example, while the latest batch of PMIs were strong, the Chinese credit impulse, which has been a barometer for the near-term trajectory of European exports, remains weak.

In summary, even if their base case of Europe surprising to the upside this year remains valid, a period of indigestion for the euro should still be included in any investment strategy. This is particularly true from a technical perspective.