DB FX Daily: Too Early for Concerns Over EUR Impact on Trade

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FX Daily: Too Early for Concerns Over EUR Impact on Trade

Too Early for Concerns Over EUR Impact on Trade

The ECB is widely expected to leave rates at 3.75% today with the market and our economists continuing to see the most likely timing of the next 25 bp rate rise at the June meeting. Our economists look for the ECB to keep a hawkish tone in the press conference but to avoid pre-commitment to a near-term rate hike by using the phrase "monitor very closely" rather than "vigilance". Though June remains the base case for the next rate step, there has recently been more nervousness in the market over a potential move in May as money markets have shifted to price a small probability of tightening next month. The growing body of evidence that the German economic expansion did not suffer greatly from the VAT increase and few clear signs of a sharp slowdown elsewhere in the Eurozone have supported the case for higher yields in the Eurozone and the steady advance of tightening expectations. Acknowledgement of stronger data in the press conference or comments ratifying current market pricing could boost the EUR but would be unlikely to provide as much support as the appearance of the word "vigilance". Recent ECB decisions have generally seen small EUR/USD ranges on the day (out of the past nine, only the January meeting saw a range above 100 pips) while recently EUR/USD has been bid into meetings and corrected very slightly (around -0.3%) as the ECB has so far offered few surprises.

A separate question which may arise at the press conference today or in the near future is the EUR exchange rate. With EUR/USD at its highest level since Q1 2005, EUR/JPY above 160 and EUR/CHF above 1.64, increased attention on the exchange rate, especially during the Q&A session, would not be too surprising. But a quick look at Eurozone export performance to date is likely to calm fears over the potential negative impact of the exchange rate. The chart at left below tracks the y/y change in the EUR TWI against the y/y change in Eurozone exports and shows that the very gradual nature of this most recent EUR appreciation has had only a mild dampening impact on export growth so far and at current levels does not yet pose a substantial downside risk. In addition, we have previously shown that much of the recent Eurozone export growth has come from new EU states and other European countries such as the UK and Sweden rather than the US or Japan. The chart at right below tracks the EUR against the USD, JPY and CNY which moving steadily higher could be pressuring the Eurozone's competitiveness in third countries but the EUR against other European countries has been stable to slightly lower allowing the trade growth within the region to blossom.