Market Drivers for Jan. 31, 2013
German data mixed but EUR/USD remains bid
Aussie wobbles in Asia on S&P report on China but recovers
Nikkei 0.22% Europe -0.67%
Oil $97.70/bbl
Gold $1675/oz,

Europe and Asia:
AUD HIA New Home Sales 6.2% vs. 3.0%
AUD Private Sector Credit 0.4% vs. 0.2%
JPY Industrial Production
JPY Labor Cash Earnings -1.4% vs. 1.1%
JPY Housing Starts 10.0% vs. 13.6%
EUR German Unemployment Change -16K vs. 9K
EUR German Retail Sales -1.7% vs. 0.1%

North America:
USD Personal Income 8:30
USD Personal Spending 8:30
USD Initial Jobless Claims 8:30
CAD GDP 8:30

Its been a quiet night of trade in the currency market as EUR/USD consolidated its gains amidst mixed economic data out of Germany. German Retail Sales printed far worse than expected plunging -1.7% versus forecasts of -0.1% decline as consumers clearly shut their purse strings tight during the slowdown in Q4. Part of the drop was attributed to calendar effects, but even on a calendar adjusted basis December turnover was considerably weaker than anticipated.

The dour news on the consumption front was offset by much better than expected German labor data. Unemployment declined by a whopping -16K versus expectations of a rise of 10K. Improving business confidence especially amongst the small to medium sized companies has been a key driver of demand as Germany continues to rebound from the Q4 slump.

The positive news on the labor front is much more important than the dip in consumption. The increase in jobs will lead to higher incomes which in turn should help boost consumption in Euro-zone’s largest economy as the year proceeds. The German unemployment helped to steady the EUR/USD and the pair remains above the 1.3550 level as longs continue to target the 1.3600 figure on enthusiasm over the recovery in the region in Q1 of this year.

Meanwhile in Asia, Aussie dipped below the 1.0400 level once again after a report by the S&P suggested that China’s investment boom will have to cool considerably in the foreseeable future. According to S&P economists, who’ve come up with a model to determine the vulnerability of economies to an investment led collapse, China ranks number one on the list.

The S&P methodology compares investment spending as a percentage of GDP to real GDP and adjusts the two measures in a way that makes it possible to rank fast- vs. slow-moving economies in terms of risk. China, with 40% of its GDP tied up in investment ranks the highest in terms of risk.

Although the S&P report indicates that such imbalances may lead to a an economic collapse, at the very least it suggests that China will have to rebalance its growth towards consumption in order to avoid a possible bust. The Aussie which has been the primary beneficiary of China’s infrastructure boom as the supplier of key commodities immediately sold off on the news dropping to a low of 1.0380 in late Asian trade.

Fears over the slowdown of the great “China demand” trade have dogged Aussie since the start of the year and the pair has been relatively weak as a result of those concerns. For now it appears to have stabilized near the 1.0400 level and may consolidate around the figure for the rest of the day. However, if the pair breaks the 1.0380 lows in North American session it may tumble all the way to 1.0350 as the day proceeds.

In North America today the markets will get a glimpse of the weekly jobless claims, personal spending and personal income data as well as Chicago PMI release. The latest consumer confidence data has been much worse than anticipated, affected in large part by the increase in payroll tax rates and the political wrangling in Washington. Therefore it will be interesting to see if the dour attitudes translated into a reduction in spending. On the other hand the weekly jobless numbers continue to impress and if today’s results beat expectations once again, the news could help boost USD/JPY which has also been chopping around for most of the night near the 91.00 figure. Although even if the pair rallies it may have a very difficult time clearing the 91.50 barrier given the fact that there are more that 5 Billion of option expires reported at that level.

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