Business

Poor GDP Sinks Euro

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Candice writes for several publications, including The Christian Post, Red State, The Black Sphere and Patriot Update. She is the Science & Tech Editor at the Minority Report Blog and the founder and Editor-in-Chief at Front Lines. She's also the founder of Candice Lanier's Tech News and works as a computer consultant. Additionally, Candice is an antiques dealer.

MREuro

Zero Hedge – After trending gently higher for the first half of the week, the euro has been sold to new three week lows in response to the disappointing Q4 GDP figures. The GDP figures are of course backward looking and more recent data, such as the PMI figures and German factory orders suggest the regional economy is stabilizing here in early Q1.

There is a middle step to go from the GDP figures to the euro and that is the interest rate channel.  There has been some speculation that the passive tightening of the euro area financial conditions (including the shrinking of the ECB’s balance sheet) and the strength of the euro would prompt the ECB to cut the refi rate later in Q1.  The poor GDP readings bolster such expectations and this can be seen in short-term interest rates.  The March Euribor futures contract is now implying 0.24% rate, having matched the lowest rate since Jan 23, or before the early repayment of LTRO I was announced.

 

Another way to see this is in the US-German 2-year interest rate differential, which continues to track the euro-dollar exchange rate.    Recall the sequence of events.  In early Dec 12, the US was offering about 32 bp more than Germany on 2-year obligations. By late January, the US was at a  2 bp discount.  However, this month it has been trending back toward the US and today, at 8 bp, the US premium is the largest since mid-Jan.

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