Market Drivers January 7, 2015

EZ core CPI 0.8% vs. 0.6% but EUR/USD rally fails to hold
AU Services PMI 47 vs. 43 but Aussie breaks below
Nikkei 0.01% Europe 0.77%
Oil $47/bbl
Gold $1215/oz.

Europe and Asia:
AUD AIG Svc 47.5 vs. 43.8
EUR GE Retail Sales 1.0% vs 0.2%
EUR GE Unemployment -27K vs. -6K
EUR CPI 0.8% vs. 0.6%

North America:
USD ADP 8:15
USD Trade Balance 8:30
CAD Ivey PMI 10:00
USD FOMC Minutes 14:00

Another choppy and volatile night of trade in the currency market as the dollar continued to strengthen against most of the majors but remained placid against the yen. The euro continued to absorb most of the punishment with the pair making yet another fresh low in very thin market conditions at the open of Asia as it plunged to 1.1840 before finally recovering somewhat.

The data from the EZ was actually relatively positive with German Retail Sales up 1.0% versus 0.2% eyed while unemployment improved dropping by -27K versus -6K forecast. Even the core EZ CPI came in a bit better at 0.8% vs, 0.6% but the headline data showed further signs of deflation as it printed at -0.2%

The bottom line however is that while Germany’s economy may be doing well, the rest of the EZ continues to teeter on the brink of recession and deflationary forces remain in place especially as oil price continue to drop. Against this backdrop the market continues to assume that the ECB will got to full QE while the Fed will edge closer to normalization.

Today FOMC minutes could prove to be a key catalyst for further dollar rally, especially if they suggest that the US policymakers are looking past the weak oil prices and view the deflationary impact of the decline as temporary. Still the policymakers are sure to remain data dependent and to that end the most recent US economic releases show a slowdown in activity. The latest ISM Non- Manufacturing report dropped sharply from last month’s reading and more importantly the employment component declined as well.

Today’s ADP data will be the first glance at the December labor demand and as long as the number prints above 200K the dollar rally should not be impeded. However if the ADP prints below 200K signaling a possible miss in the NFPs on Friday USD/JPY could see a sharp selloff with 118.00 tested once again.

Although the FOMC may be sanguine about US growth prospects, if the data begins to show a different story the market will have to do a rethink about the king dollar thesis and while the euro could still remain weak USD/JPY may not be able to hold its bid.

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