Market Drivers for August 25 2014

German IFO weaker than even down estimates but Euro sold out

Kiwi crashes on fears of DotCom participation in elections

Nikkei 0.48% Europe 1.02%

Oil $93/bbl

Gold $1277/oz.

Europe and Asia:

EUR IFO 106.3 vs. 107.1

North America:

USD Flash PMI 09:45

USD New Homes 10:00

The German IFO survey printed even worse than forecast but the EUR/USD which was already sharply lower at the start of the week’s trade saw no further follow through as the pair appeared to have reached a selling climax for the time being.

The IFO survey came in at 106.3 versus 107.1 eyed. This was considerably lower than last month’s reading of 108.00. The Current Assessment was also lower at 111.1 while future expectations declined to 101.7.

The IFO is now more than 5 points off its peak of 110.7 set earlier this year as the geopolitical tensions with Russia and the slowdown in activity in the EZ region are clearly starting to take their toll on German economy. IFO spokesman Wohlrabe insisted that Germany was a long way from recession noting that auto and chemical sectors have shown improvement recently and that domestic demand remains solid. However, he did acknowledge that the current slowdown is likely send Q3 German GDP close to zero.

Despite the worse than expected news the EUR/USD saw very little reaction to the news and remained essentially moribund just below the 1.3200 figure in the aftermath of the release. The pair gapped lower at the start of the Asian session open and may simply be sold out for the time being as negative sentiment has reached an extreme. Having fallen nearly 300 points since the start of the month the pair could be due for small dead cat bounce especially as technical traders line up their bids ahead of the 2013 lows at 1,3150 level.

For now any further downside action will likely have to come from US data, which will become a key focus of the market as currency traders now try to gauge the possible date for US rate hikes. Although Fed Chair Yellen gave no indication when that may occur, the market consensus is that the rate tightening cycle will likely commence mid 2015 and it the US data continues to confirm that thesis the dollar will maintain its advantage over the euro.

Elsewhere the kiwi came under intense selling at the start of week’s trade in Asia on fears that the infamous web entrepreneur Kim DotCom who is wanted on piracy charges in the US, may be starting to influence the New Zealand election. Mr. DotCom’s party has aligned itself with the Maori party and is polling at 5 percentage points – a big enough swing in New Zealand politics that could possibly give the ruling majority to the opposition Labor party.

Such a move leftward would not doubt shake up the currency markets which have been caught by surprise expecting yet another win by the National party that would maintain the economic status quo. With election coming up on September 20th the scrutiny on the polls will likely increase markedly and so will the volatility in the kiwi, if Mr. Dotcom’s attempts to upend the establishment rule in New Zealand appear to gain momentum over the next few weeks.

In North America today the focus will turn to New Homes Sales with markets expecting a jump to 426K from 406K the month prior. An increase in new residential construction would be another sign of US economic recovery and could support USD/JPY which hit multi month highs of 104.30 earlier in the session, but has since traded back to 104.00 on some early profit taking.

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