Market Drivers September 24, 2015

IFO better than forecast but euro hovers at 1.1200
AUD breaks below 6950
Nikkei -2.76% Europe -0.33%
Oil $44/bbl
Gold $1134/oz

Europe and Asia:
NZD Trade Balance -1B vs. -875M

JPY Flash PMI 50.9 vs. 51.3

EUR IFO 108.5 vs. 107.8

North America:
USD Durable Goods 8:30

USD Weekly Jobless 8:30

USD New Home Sales 10:00

The Aussie was badly beaten in early European trade today on concerns of further rate cuts from the RBA while all the other majors held their own against the buck in a generally quiet session.

AUD/USD, which broke the key 7000 support level in late North American trade yesterday, continued its selloff drifting through the 6950 level as shorts pressed the case mercilessly. The pair has been badly damaged on concerns over the slowdown of the Chinese economy and the knock on effects of the country’s massive mining sector.

Tonight’s price action however was driven by a report from ANZ Research that suggested that the RBA may cut rates twice in 2016 taking the benchmark rate to 1.50%. Were this to be true the Aussie would no doubt decline as the last of the carry trade speculators would bail from the unit.

Analysts remain highly pessimistic about the prospects for growth in Australia despite the fact that the country has been able to weather the slowdown in China so far without slipping into a recession. Indeed employment in Australia has held up remarkably well as the economy has been able to rebalance towards services and away from mining. Still most analysts remain decidedly dour about Australia’s ability to avoid a recession as a result of the sharp decline for commodities from the developing nations.

Next week the Aussie calendar is generally light but it will bring data on Building Permits and Retail Sales. If the housing market and the consumer both show weakness, the Aussie could come under a fresh selling assault as investors fears of an RBA rate hike possibly even before the end of the year could drive the unit to fresh multi year lows below the 6800 figure.

Meanwhile in Europe the EUR/USD held bid at around the 1.1200 level. The latest IFO report came in slightly better at 108.50 versus 107.90 but the pop in the euro was contained as IFO economists warned that the numbers did not reflect the impact of the VW emissions cheating scandal. Today BMW shares were off as much as -8% as the automaker was also accused of skirting the emissions regulations on its diesel models.

The scandal which now appears to be spreading to all of German auto industry could have massive negative ramifications if investigators find widespread evidence of regulatory avoidance. German auto industry is responsible for 20% of the country exports and even marginal hit to demand could affect the German economy significantly. That’s why we find investor complacency towards the euro to be so puzzling.

The single currency has essentially shrugged off the troubling headlines and in fact continues to post multi week highs against many of the majors including the pound. The market may be looking past the news out of Germany and focusing on pick up in activity elsewhere as the moribund EZ economy appears to finally showing signs of life. For example today’s Italian Retail Sales data showed a gain of 0.4% versus a decline of -0.4% the month prior.

In North America today the calendar carries Durable Goods and weekly jobless claims as well as New Home Sales data. Expectations are for modest increases in all and currency markets are unlikely to react much to this second tier data. Instead the focus will likely be on equity flows as well as key technical levels. If the short decide to redouble their efforts in AUD/USD then the .6900 level could come under assault.

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