Better IFO Keeps the Risk Rally Going

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Market Drivers December 19, 2012
Euro well bid at 1.3250 as IFO beats for 2nd month
USD/JPY near Sunday gap open of 84.50 as trade balance misses
Nikkei up 2.39% Europe up 0.44%
Oil $88.01/oz.
Gold $1675/oz.

Europe and Asia:
JPY Merchandise Trade Balance Total -0.87T vs. -0.81T
JPY All Industry Activity Index 0.2% vs. 0.4%
JPY Leading Index 0.1% vs. 0.6%
EUR German IFO – Business Climate 102.4 vs. 102
EUR German IFO – Current Assessment 107.1 vs. 108.0
EUR German IFO – Expectations 97.9 vs. 96.4
GBP BOE Minutes

North America:
USD Housing Starts 8:30
USD Building Permits 8:30

It’s been another good day for risk assets in early European trade as EURUSD set fresh 7 month highs in the wake of stronger than expected IFO survey while cable zeroed in on the 1.6300 barrier. The IFO survey printed at 102.4 versus 102.00 eyed, while future expectations rose to 97.9 versus 96.9.

This was the second month in a row of better than anticipated readings suggesting that business sentiment in Europe’s largest economy continues to improve as the risk of sovereign debt crisis in the region continues to recede. According to IFO President Hans Werner Sinn Christmas business was going well especially for electronics and sporting goods sectors and the institute expected growth to recover in Q1 of 2013 after dipping slightly in Q4 of this year.

The euro has been a strong beneficiary of better risk flows as investor sentiment on both sides of the Atlantic improved markedly over the past month. The latest IFO survey confirms that the worst of the contraction for the German economy may be over. According to Mr. Sinn the calming of the EZ crisis has helped stabilize corporate sentiment as export expectations have improved.

Meanwhile in UK the BOE minutes revealed little fresh info as the MPC agreed to keep QE at 375B GBP with an 8-1 as only Miles opted for an additional 25B of easing. Most MPC members agreed that the past months developments did little to alter QE arguments with monetary policy officials expecting UK economy to contract slightly once again in Q4 of this year. The MPC noted that risks from the EZ were now less pressing, but were concerned about the UK competitiveness and the prospect of lower exports.

Despite the cautious tone of the minutes cable rallied well throughout the night taking out the 1.6300 barriers as it hit 3 month highs. Still despite cables strong performance the pair may lag euro if the Fiscal Cliff issues in US are resolved helping to propel the risk rally further. EURGBP has been within striking distance of the 8160 barrier over the past several days and a could move through 8200 and beyond if investors start to bet on a European recovery while UK economy lags.

In North America today the eco calendar carries only Housing starts and Building permits data but focus will remain on Washington DC. The market continues to believe that some sort of deal will be done before year end and that attitude has helped to bolster risk flows over the past several days. The EURUSD now targets the 1.3300 level as the day proceeds and could barrel through it if there is any word out of DC that progress is being made.

Boris Schlossberg
Managing Director

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