Data this morning has confirmed that the eurozone remains
very much in recession. We knew that this was the case, but we didn’t know
quite conditions were quite this bad. In the final three months of 2012, the French
economy contracted by 0.3%, Germany’s by 0.6% and Italy’s by 0.9%, with all
three GDP figures coming in worse than market expectations. The euro weakened
on all of these data releases. Perhaps surprisingly, given that the market had
the above figures already out in the open, the euro also weakened as a result of
the overall eurozone GDP figure, which revealed a 0.6% contraction. Meanwhile, Portugal
also posted a 1.8% contraction, while the Netherlands shrank by 0.2%. Spain we
know contracted by 0.7%. Suddenly the UK’s Q4 GDP figure of -0.3% doesn't seem quite
so disastrous.
The market has been content to ignore weak eurozone data in recent months and as a result the euro has had an easy ride. Super Mario
(Draghi) said he would do whatever it takes to keep the euro afloat, Greece
managed to kick the can further down the road, and bond yields have been
brought under control. All is well? All is not well - these eurozone figures are a reality check and really bring home what
the market has seemingly been willing to sweep under the carpet.
Perhaps the market is not ignoring it and perhaps they are
looking beyond at a recovery in 2014, basking in the relief that the debt
crisis no longer threatens the very existence of the euro. Either way, if data
like today's continues to filter through in 2013 without significant improvement,
then the ECB will be forced to act by cutting interest rates and you can be
sure that the market will sit up and take notice when that happens. Germany has posted some encouraging
figures so far in 2013 but it is anything but plain sailing for the euro from
here.
The strong eurozone exchange rate over the past few months will
surely have contributed to these awful eurozone GDP figures. The ECB remains
reluctant to intervene to weaken the euro but they will have limits to what
sorts of levels they are willing to tolerate. This is a key factor behind
EUR/USD’s stalling ahead of $1.40. Next up, the Italian elections - expect the nerves to continue jangling over the next week or so.
Richard Driver
Currency Analyst
Caxton FX
