Market Drivers for August 17th, 2012
Euro propped by Merkel comments, strong CA data
Aussie dumped on EUR/AUD short covering flows
Nikkei up 0.77% Europe up 0.40%
Oil at $95/bbl
Gold at $1619/oz.

Europe and Asia:
EUR German Producer Prices 0.0% vs. 0.4%
EUR Current Account 12.7B vs. 10.3B

North America:
USD U of Mich Confidence 9:55
USD Leading Indicators 10:00
CAD CPI 8:30

Euro firmed on the last trading day of the week boosted by better than expected current account and trade data from the region and continued supportive rhetoric regarding the euro from EZ officials. The pair rose to a high of 1.2381 in mid-morning Friday dealing strongly outperforming other high beta currencies as concerns over the credit crisis continue to ease with Spanish 10 year yields trading at 6.5% fully 100 basis points lower from a month ago.

On the economic front Eurozone current account printed much better than forecast, rising to 12.7 Billion surplus versus 7.8 Billion eyed helping to support the euro in morning European trade. This was the highest reading in well over 5 years and the fourth consecutive monthly surplus this year.

Despite the sovereign debt problems and the serious contractions affecting its periphery regions, the EZ current account position has improved markedly this year. After posting several years of persistent deficits, the EZ is on track to record a surplus in its current account this year led largely by Germany’s dominant position in trade.

The trade balance also improved rising to a much larger than forecast 10.5 Billion from 5.4 Billion initially forecast. The surplus in June hit a record high with two prior months also revised upward. The news shows both the strength of the German export engine under the euro regime as well as its vulnerability should the monetary union fracture. The single currency has provided Germany with unprecedented pricing power in the region allowing its exports to remain competitive. Little wonder then that Angela Merkel reaffirmed her commitment to the euro project even as she faces political opposition at home to further bailouts for the periphery economies in the union.

With little economic data on the US calendar today save for the U of M numbers, trading may remain relatively subdued for the rest of the day. However, with risk appetite rising a prop from equities may help to push EUR/USD towards the 1.2400 level which has served as stiff resistance for several weeks. A break through that barrier would then open the possibility of a run to the psychologically key 1.2500 handle as further short covering kicks in and fears of a euro fracture begin to abate.

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