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  • The case for the downside solidified by recessionary German data.
  • Markets buying back the yen on fears of global economic decline.  

At the start of the month, EUR saw the largest selling by leveraged funds in response to the dovish ECB meeting and most of the Dollar selling was against the Yen. It still makes perfect sense to be short of EUR/JPY in this climate where Germany’s economy and risk appetites are at rock bottom, or at least on a nife’s edge with further room to fall.

Global markets pivoted yet again back into risk-off mode on Wednesday as well rate cut provoking data from the EZ and the EUR/JPY responded in kind, falling from a high of 119.27 to a low of 117.78.  According to the Federal Statistics Office, German Gross Domestic Product figures in Q2 contracted by 0.1% leading some Banks to cut their growth forecasts for the economy pointing towards the makings for a technical recession.  

“Given the deteriorated outlook for H2, Deutsche Bank Research has cut its 2019 GDP forecast to 0.3% (from 0.7%),” analysts at the troubled European bank said:

  • Q2 GDP drop of -0.1% qoq was the second quarterly contraction within the last 12 months. Given the deteriorated outlook for H2 we have cut our 2019 GDP forecast to 0.3% (from 0.7%). A rapid recovery from this low growth environment in 2020 seems unlikely from today’s perspective.
  • Given the 1.5% slump in June industrial production (negative carry-over), the further clear weakening of ifo and PMI surveys in July, and the nose-diving August ZEW, we expect a drop of about 1/4% for Q3 GDP, pushing the economy into a technical recession. We expect stagnation in Q4 assuming that the major global areas of uncertainty do at least not see a further escalation.
  • If this assumption turns out too optimistic, negative quarterly growth rates could prevail into 2020.

In other gloom and doom news, there are counter-arguments for a protracted trade war between the US and China surfacing again underpinned by Hong Kong risks and markets today panicked over the 2 and 10-year UK and US yields inverting for the first time since the financial crisis. The yield inversions indicate a forthcoming recession and, Gregory Daco, the chief US economist at Oxford Economics, points out that there has been a gap of 10 months to three years between the indicator occurring and the previous recessions in the US. The Federal Reserve will be absolutely critical for markets at this juncture.  

EUR/JPY levels

“Support at 117.40 guards the 114.86 2017 low. The break lower last week saw the market erode a 2012-2019 support line and this leaves a negative bias entrenched while below the downtrend,”

analysts at Commerzbank argued.