German exports weakened further over the summer
Lead — The recent decline in German export figures indicates a potential softening in the nation's economic resilience, as highlighted by August's 0.8% month-on-month drop in exports. This weakening trend follows promising industrial production numbers and a rebound in sentiment indicators from earlier this year. Per the full note, the German trade balance remains robust with a surplus of €19.5 billion, yet the ongoing structural challenges, particularly regarding trade relations with key partners, suggest that this resilience may not be sustainable in the longer term. As global economic pressures mount, the narrative surrounding Germany's export strength is increasingly strained by geopolitical factors and evolving competition dynamics, especially with China and the U.S., which could have implications for FX positioning in the EUR/USD pair.
What the desk is arguing
The desk interprets the decline in German exports as a sign of fragility within the largest economy in Europe, challenging the earlier narrative of recovery. Per the full note, this marks the second consecutive month of export reductions, complicating the backdrop of previously encouraging industrial output.
Notably, while imports have risen, thereby expanding the trade surplus, the implications of rising imports, alongside declining exports, could indicate domestic demand challenges. With geopolitical tensions shifting trade flows, particularly with China seeing a notable decrease in export receipts from Germany, there’s potential for medium-term economic ramifications.
Where it sits in our coverage
Our current consensus for EUR/USD is 1.075, with a range between 1.04 and 1.12 corroborated by positions from several firms: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view reflects potential downside risks amidst the ongoing geopolitical shifts affecting trade dynamics, aligning closely with jpmorgan’s bullish outlook while diverging from bofa’s more cautious position, indicating possible market sentiment around evolving trade risks.
How other firms see it
Several firms, including deutschebank and citi, are aligned with the bearish outlook on German exports, suggesting a consensus on the possible headwinds facing the economy. Conversely, goldmansachs appears more optimistic, indicating a belief in a rebound in export performance in the coming months.
The EUR/USD trajectory merits attention as it may reflect the broader shifts linked to German export activity, alongside the ongoing monitoring of U.S. Federal Reserve policy, which could play a significant role in dictating USD dynamics against the euro.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01German exports fell 0.8% MoM in August, marking a continued decline amidst prior signs of recovery.
- 02The widening trade surplus, despite lower exports, signals potential domestic demand issues.
- 03Geopolitical factors, especially concerning China and trade tensions, are reshaping export dynamics.
- 04Traders should pay attention to EUR/USD movements as they might reflect these economic shifts.
Market implications
Traders should watch for any continued weakness in the EUR/USD pair, particularly if export data throughout the autumn shows consistent declines. A break below support at 1.07 could suggest a more pronounced bearish sentiment. Monitoring shifts in global trade policy will also be critical in determining future positioning.
Risks to this view
Should there be a sudden resurgence in German export activity or if geopolitical tensions ease significantly, the current bearish view on the euro might require reevaluation. Additionally, stronger-than-expected data from the U.S. could undermine the EUR/USD outlook, posing challenges to bearish positions.
Older quick take Quick take Published 07:20 Germany German exports weakened further over the summer After promising industrial production figures and encouraging sentiment indicators in recent weeks, today's export data dents the narrative of German resilience German exports dropped for the second month in a row in August Trade is where German resilience is faltering. While German exporters benefited from Asian competitors being hit harder by the closure of the Strait of Hormuz in the second quarter, the third quarter so far has been a setback. In August, German exports fell 0.8% month-on-month, down from -0.5% MoM in July.
At the same time, imports increased by 0.9% MoM, widening the German trade surplus to €19.5bn. The disappointing export performance in July and August could be a sign of how low water levels in main rivers have been affecting the economy. Structural shifts in the German export sector continue It is clear that the structural challenges for German exporters remain: geopolitical shifts and trade tensions are clearly affecting an economy that benefited enormously from free trade.
The geopolitical shifts are clearly reflected in the shifting nature of German trade. The most remarkable one is the changing role of China, from a welcome export destination to a rival. In the first half of the year, only 4% of German exports went to China, compared with around 8% in 2020.
At the same time, and despite tariff tensions, exports to the US remain strong, with the US still accounting for more than 9% of total German exports. As for Europe, any German Schadenfreude over France's fiscal difficulties would be misplaced. France accounts for more than 7% of German exports, meaning any economic weakness there is unlikely to leave Germany unscathed.
Turning back to China, Germany and France have begun to take a tougher stance on what they see as unfair competition. Both governments have advocated giving the European Commission, which is already responsible for trade policies in Europe, stronger powers to respond. In particular, they want to strengthen the anti-coercion instrument, aka Europe's "trade bazooka", making it faster, more effective and easier to deploy.
All in all, after promising industrial production data yesterday and encouraging sentiment indicators in recent months, today’s trade data clearly bruises the German resilience narrative. Trade policy Germany GDP Eurozone Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.
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