Market Drivers May 24, 2013
IFO beats handily driving EUR/USD towards 1.3000
Nikkei seesaw putting USD/JPY on roller-coaster
Nikkei 0.89% Europe 0.56%
Oil $94/bbl
Gold $1387/oz.

Europe and Asia:
NZD Balance 157M vs. 475M
EUR German GDP -1.4% vs. -1.4%
EUR German GfK Consumer Confidence Survey 6.5 vs. 6.2
EUR German IFO – Business Climate 105.7 vs. 104.5
EUR German IFO – Current Assessment 110.0 vs 107.2
EUR German IFO – Expectations 101.6 vs. 101.6
GBP BBA Loans for House Purchase 32.2K vs. 32.7K

North America:
USD Durable Goods Orders 8:30
USD Durables Ex Transportation 8:30

A better than expected IFO reading boosted investor confidence in Europe and helped to propel the EUR/USD towards the 1.3000 level in morning European trade. The IFO printed at 105.7 versus 104.5 eyed while the current assessment component also rose better than expected to 110 from 107.2 forecast.

The latest IFO results led Klaus Wohrable, the Deputy Department head to suggest that Q2 German GDP will be considerably better than Q1 reading. Mr. Wohrable noted that construction activity picked up immensely in May as pent up demand came on line. He also stated that export orders continue to do well and that the latest rate cut by the ECB has had a positive psychological impact on the German business sector.

The improvement in German sentiment is not restricted to business sector alone. Earlier in the session the German GFK Consumer sentiment survey registered its best reading in 5 years printing at 6.5 versus 6.2 eyed. Taken together the two surveys suggest that conditions in Europe’s largest and most important economy are clearly improving and that augurs well for the rest of the EZ and could help pull the region out of recession as the year progresses.

The EUR/USD pushed its way to 1.2990 in the aftermath of the news, but the rally stalled just ahead of the key 1.3000 mark. The 1.3000 level is a very stiff point of resistance for the euro as represents strong former support from which the unit tumbled over the past several weeks. Whether the pair can clear that hurdle will likely depend on North American session where investors will have to reassess the EZ growth prospects given the lastest IFO data.

Meanwhile in Japan the placid final closing numbers from the Nikkei belied the massive volatility in stocks tonight. The index was up nearly 2% then down 3% until finally ending up a little better than 1%. This strong turbulence may be the new fact of life in the Japanese financial markets as the BOJ massive QE program is clearly triggering wild investor moves in the Land of the Rising Sun.

Japanese officials are clearly trying to pacify the markets and make sure that the JGB yields do not gyrate wildly but so far they have only employed jawboning with PM Abe noting that the BOJ is not buying government debt directly while BOJ Chief Kuroda emphasized that the central bank’s primary focus is on deflation rather than stock market valuations. Still if the volatility does not dampen soon Japanese policymakers may need to take firmer steps to pacify the markets with some analysts suggesting that the BOJ may need to implement its own version of LTRO in order to stabilize the sovereign debt instruments.

For now USD/JPY continues to mirror the volatility in other markets with the pair rising to a high of 102.89 only to tumble back to 101.08 in overnight trade. It appears that for now the 103.75 level will remain as a near term top as the pair consolidates its latest rally, but a further fall to 100.80 could trigger a deep correction that could test the key 100.00 level support.

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