Euro Retreats As French Manufacturing Output Tumbles

The euro retreated against its main rivals on Wednesday as French manufacturing output tumbles. Presently, the euro trades around $1.4354, or 0.15% below its previous close. At the same time, the euro continues to fall against the Japanese yen. Last week, the Bank of Japan intervened in the markets in order to weaken yen. For all its best effort, the euro is about to fall below the ¥110 line, trading at ¥110.12, or 0.45% below its previous close.

 

The euro was hit by deterioration in the French economic activity. According to Insee, France’s manufacturing output fell 1.9% in June compared to the previous month. In May, manufacturing output surged 1.4%. At the same time, industrial output declined 1.6% in June from a 1.9% increase in May. The numbers are equally bleak on a quarterly basis. In the June quarter, manufacturing output fell 0.4% compared to the previous quarter, while industrial output declined 0.5%.

 

France is the second largest economy in the Eurozone. Along with Germany, France is traditionally the main locomotive of the Eurozone growth. With economies of Spain and Italy desperately in need of some tailwind, the weakening in France might signal problems for the whole Eurozone. Germany is still growing strongly, but it is not clear if the German consumers alone can add sufficient momentum to the Eurozone recovery.

 

More worrying for the Eurozone, rumours are mounting that France might be the next big player to lose its Triple-A rating. Analysts are worried because France is one of few developed countries to still have a primary budget deficit, i.e. a deficit even when repayments on previous debt are excluded. President Sarkozy has sensed the danger and has interrupted his vacation to hold an emergency government meeting on Wednesday. The stakes are very high. With Italy and Spain already under heavy fire, the future of the Eurozone looks very bleak if France makes a transition from the Eurozone centre to the Eurozone periphery.

 

While some Eurozone members are fighting high unemployment and large debt, Germany’s main worry seems to be inflation. The Eurozone’s largest economy has defied the odds and has come out of the 2008-2009 recession very strong. Some analysts are worried that Germany’s economy might be overheating. According to Federal Statistics Office, Germany’s CPI rose 2.4% in July year-over-year, which is a bit above 2.3% recorded in June. Germany’s inflation rate has been continuously above the ECB’s 2% target, prompting the central bank to raise interest rates in its July meeting.

 

Analysts have welcomed the recent announcement by the Fed Chairman, Ben Bernanke, to maintain very low interest rates in the United States until mid 2013. The crises in the Eurozone and the United States are feeding on each other. Since the European and American political elites are unable and/or unwilling to make decisive moves, the Fed Chairman had to step in.

 

ACTION ITEMS:

Bullish:

Traders who believe that the crisis in the United States will be resolved soon, which should help the Europeans to sort out their own mess, might want to consider the following trades:

  • WisdomTree Dreyfus Euro Fund is a long play on the euro. EU may rise if the euro appreciates.
  • ProShares Ultra Euro ETF is another long play on the euro. However, ULE should rise more than EU if the euro appreciates.

Bearish:

Traders who believe that the European political elites lack courage and/or imagination to implement radical reforms may consider an alternate positions:

  • ETFS Short Euro Long US Dollar ETC (Sterling) ETF (SEUP) is a short play on the euro. SEUP may rise if the euro depreciates.
  • ProShares UltraShort Euro ETF is another short play on the euro. However, EUO should rise more than SEUP if the euro depreciates.

— Emily Austin

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