Market Drivers for May 15, 2013
German and French GDP miss sending EURUSD slower
USD/JPY breaks 102.50 on BOJ flood of bond market
Nikkei 2.29% Europe -0.03%
Oil $93.50/bbl
Gold $1409/oz.

Europe and Asia:
JPY Tertiary Industry Index -1.3% vs. -0.6%
EUR German GDP 0.1% vs. 0.3%
EUR EZ GDP -0.2% vs. -0.1%
GBP BOE Inflation Report
GBP Jobless Claims Change -7.3K vs. -3.1K
GBP Average Weekly Earnings 0.4% vs. 0.7%
GBP ILO Unemployment Rate 7.8% vs. 7.9%

North America:
USD PPI 8:30
USD Net Long-term TIC Flows 9:00
USD Industrial Production 9:15
USD Manufacturing Production 9:15
CAD Existing Home Sales 9:00

The euro was battered by weaker than expected EZ GDP data which printed at -0.2% versus -0.1% pushing the pair through the 1.2900 figure in early morning European trade. The single currency hit a six week low against the greenback as GDP reports showed that the EZ is now in the midst of its longest contraction since the introduction of the euro.

The broader EZ GDP data was led lower by misses in both German and French reports. German GDP eked out a tiny 0.1% gain in Q1 versus 0.3% eyed while France saw its GDP contract by -0.2% versus -0.1% forecast. The near total absence of growth in the EZ core bodes badly for the region as a whole indicating that the rebound in economic activity may be long time coming as the region shows little prospect of pick up.

The market is now witnessing the sharp contrast in economic results between the moribund Eurozone and the surprisingly robust US which many analysts attribute to the diverging monetary policies of the ECB and the Fed. The Fed’s aggressively accommodative stance has served to offset some the of the fiscal austerity in North America and translated into better than expected growth and improving labor markets.

Meanwhile the ECB’s passivity in the face of the draconian cuts in fiscal spending has resulted in an economic quagmire with growth in the region at standstill as deflation takes hold. If the recent BOJ experiment in highly accommodative monetary policy boosts Japanese economic growth, the pressure on European policymakers to ease further will accelerate.

The EUR/USD stabilized at 1.2900 in the wake of the disappointing GDP news, but the pair could see more selling as North American session comes on line especially if US data which includes Industrial Production and NAHB housing data surprises to the upside.

In UK today the labor data printed a bit better than expected with claimant count declining to -7.3K from -3.1K eyed while the unemployment rate dropped to 7.8%. However wages rose a measly 0.4% versus 0.7% projected suggesting that the squeeze on consumer purchasing power continues. On the positive side the BOE report indicated that CPI will continue to decline, although it estimated that inflation will remain above 2% for much of next two years. Overall the mildly positive tone of the report and the better labor data helped to propel the pound through the 1.5250 level in London trade and the pair could push towards the 1.5300 figure as it tries to recover after several days of sharp losses.

The dollar rally continues unabated in FX with USD/JPY taking out the 102.50 level in Asian session trade after the BOJ announced that it pumped 2.8T yen into the JGB market to stabilize the bonds. The volatility in the JGB market is the only variable that could scuttle the USD/JPY rally, but for now the situation appears to be under control. With 102.50 taken out the long will now target the 103.00 level as the dollar rally shows no signs of slowing.

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