Market Drivers July 11th, 2012
Risk rises as EZ credit spreads ease
Australian Consumer confidence hits 5 month highs
Nikkei down -0.08% Europe off -0.21%
Oil at $84.75/bbl
Gold at $1578/oz.

Europe and Asia:
AUD Westpac Consumer Confidence 3.7% vs. 0.3%
AUD Home Loans -1.2% vs. 0.8%
JPY Tertiary Industry Index 0.7% vs. 0.2%
JPY Machine Tool Orders -15.5% vs. -3.0%
EUR German CPI -0.1% vs. -0.1%

North America:
USD Trade Balance 8:30
USD FOMC Minutes June 19-20 14:00

Pound and Aussie hit fresh weekly highs in Asian and early European trade while euro lagged but nevertheless recovered off its lows as a decline Spanish credit spreads helped improve sentiment and spur a short covering rally in the currency market. Spanish government yields were lower dropping to 6.71% as Prime Minister Rajoy outlined further austerity measures totally about 65 Billion euros. The news helped to stabilize the EZ credit markets and revived risk appetite, but investors remained very wary of the euro continuing to rotate into safer high beta currencies like the Aussie an and the pound.

The Aussie in particular has benefited from continued selling in EUR/AUD . The cross has broken the key 1.2000 barrier and may drift lower as the day progresses. EURGBP has also come under steady assault tumbling through the key .7900 level in morning London dealing. With euro remaining on its back heels as concerns over Spanish and Italian debt continued to dog the unit, the pair could not quite make it to 1.2300 amidst the broader rally in risk, but it may clear that level later in the day if risk flows prove supportive. Still the unit Is hobbled by the inaction of EU policy makers and will likely continue to underperform the other risk currencies as investors look elsewhere to park their money.

On the economic front Australian consumer confidence soared to a 5 month high helping to lift Australian dollar well above the 1.0200 level. The index advanced by 3.7% to 99.1 – its highest level since February as the accomodative monetary policy of the BA appears to be making an impact on consumer demand. RBA has cut 125 basis points off its benchmark rate since it began its easing campaign and Australian home owners, most of whom carry variable rate mortgages have clearly benefited from the reduction in debt service costs. Amongst mortgage holders, confidence increased by 5.5%, suggesting that the RBA policy is making its mark.

Later today Australia reports its monthly employment numbers and that release could determine if the RBA will cut rates further at its meeting next month. Markets are anticipating a very modest increase of 0.3K versus 38.9K gains the month prior. If the data prints in line or lower, chance are good that the RBA will reduce rate further. The swap markets are pricing in a 74% chance that the RBA will lower rates by 25bp to 3.25%, but those odds may change if the labor data proves to be stronger than forecast.

In North America today the calendar only carries US Trade data with markets expecting a modest improvement to -48B from -50.1B the month prior. The news should have no impact on trade and FX will likely take its cues from equities with longs trying to extend the squeeze higher. If US stocks rally both pound and Aussie could target 1.5600 and 1.0300 respectively, but the recovery in euro is likely to be much more modest as sentiment towards the single currency remains negative.

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