Eurozone seasonally adjusted trade balance was €7bn in February. This was down from €12.1bn in the previous period.
The drop in the Eurozone trade surplus from €12.1 billion to €7.0 billion is a significant bearish signal for the euro. This weakening suggests that export demand is slowing down, potentially due to the euro’s recent strength, which has been holding near the 1.10 mark against the dollar. We should therefore consider positioning for potential EUR weakness against other major currencies in the coming weeks.
This trade data aligns with the latest S&P Global Eurozone Manufacturing PMI for March, which dipped to 48.5, indicating a contraction in the industrial sector. This suggests the fall in the trade surplus is driven by lower exports rather than a boom in domestic imports, a negative sign for corporate earnings. Consequently, we see an opportunity in buying put options on export-oriented indices like the German DAX.
The European Central Bank is now caught in a bind between slowing growth and persistent inflation, as the March flash HICP inflation estimate came in at 2.6%. This uncertainty about the ECB’s future interest rate path will likely increase market volatility. We can use this by structuring trades like straddles on the Euro Stoxx 50 index to profit from a large price move in either direction.
Looking back to 2025, we saw a similar scenario where a weakening trade balance in the second quarter preceded a notable downturn in the euro. Given this historical pattern, it seems prudent to anticipate a potential retest of lower levels for the currency. We are evaluating strategies such as selling EUR/CHF call spreads to finance the purchase of EUR/USD puts targeting the 1.07 level by summer.
