Market Drivers For October 15, 2012
Risk flows reverse after early sell-off in Asia with EZ periphery ticking lower
All eyes on US Retail Sales
Nikkei up 0.51% Europe up 1.20%
Oil $91.61/bbl
Gold $1748/oz.

Europe and Asia:
AUD Home loans 1.8% vs. 1.4%
CHF PPI 0.3% vs. 0.3%

North America:
USD Advance Retail Sales 8:30
USD Empire Manufacturing 8:30
USD Business Inventories 10:00

High beta FX rebounded in early European trade after selling off earlier in Asia as European equities rallied by nearly 1% helping to improve risk appetite. However for the second day in a row commodity currencies lagged the move with Aussie remaining well below the 1.0250 level as it saw very little buying interest in Europe.

Over the weekend Chinese trade data printed at 27.7B versus 20.4B as exports grew by 9.9% versus 5.5% eyed surprising to the upside and suggesting that the world’s second largest economy may be showing signs of stabilization. As we noted earlier, US economy economic demand is also surprising to the upside and may be acting as an offset for China given the deep contraction in Europe.

While the most recent US labor data statistics have come under scrutiny due to the usual election year politics, the broader underlying trends confirm the case for upward revisions. Two surveys in particular – the Citibank surprise index and the Bloomberg Economic surprise index- show that US economy is performing better than anticipated even as the threat of the fiscal cliff looms on the horizon.

Yet the better than anticipated economic results have not translated into any discernable uptake in USDJPY which has been mired in the 78.00-79.00 region for all of last week. Part of the problem has been the decline in US 10 year rates which have decline to 1.65% from 1.75% since the start of the month as fixed income investors refuse to believe the growth story.

That’s why today’s US Retail sales number could prove pivotal to setting near term investment expectations. The market anticipates a reading of 0.6% versus 0.8% the month prior which would suggest that growth remains positive but hardly robust. Yet if the data surprises to the upside confirming the recent burst in consumer sentiment, it could reset market perceptions about US performance into the year end and help extend the rally in risk assets.

The EURUSD failed to clear the key 1.3000 level last Friday, but with periphery yields in Europe trending down and even the yield on the Greek 10 year at its lowest level since restructuring in March sentiment about the EZ sovereign debt crisis is clearly improving. If US Retail sales can surprise to the upside the news should help buoy risk appetite in the US session and push EURUSD through 1.3000 while sending USDJPY through 79.00

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