Will Euro Rise Further on Better German Labor Data?

07/01/2009 12:01 am EST

Focus: FOREX

Boris Schlossberg

Managing Director of FX Strategy and Co-Founder of BKForex LLC, BK Asset Management

German unemployment printed at 31K versus 44K expected, beating forecasts for the fourth month out of the past five as government efforts to mitigate job losses appear to be working for the time being. Although the euro zone’s largest economy has lost jobs for seven consecutive months, the pace of contraction has been milder than the market’s projection, as Chancellor Merkel’s government continues to make efforts to keep workers on payroll by providing government subsidies to businesses.

German policymakers argue that it is better for the economy to retain workers on payroll, albeit at reduced wages, rather than suffer the consequences of wholesale demand destruction in the labor markets, which would in turn increase outlays for unemployment benefits and prove more costly for the federal coffers. Yet, the policy gamble of German fiscal authorities rests on the assumption that global recovery in the second half of 2009 would provide enough demand to maintain the present output capacity of the country's corporate sector. We continue to remain skeptical about the region’s ability to grow as the year progresses, especially in light of rising exchange rate values, which will likely hurt the profit margins of German corporations. The danger of this policy is that German unemployment, which is being kept artificially low given the current subsidizing policies, may accelerate at a much faster pace later in the year if global demand does not increase materially.

For the time being, however, the news remains supportive for euro bulls and the recovery trade overall, with the pair trading above the 1.4100 handle in the aftermath of the release. If later on in the day, Chicago PMI and consumer confidence also surprise to the upside, risk appetite should continue to expand and the pair could make a run to 1.4150 and beyond.

By Boris Schlossberg of GFTForex.com

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