EURCHF! Part 2

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Market Drivers Jan. 15, 2013
Yen crosses run into profit taking in Asia
Euro rebounds in early Europe on better auction and trade data
Nikkei up 0.72% Europe up 0.01%
Oil $94.30/bbl
Gold $1680/oz.

Europe and Asia:
JPY Machine Tool Orders -27.5% vs. 21.3%
EUR German CPI 0.9%
EUR German GDP n.s.a. 0.7%
GBP RICS House Price Balance 0% vs. -8%
GBP PPI -0.2% vs. 0.0%
GBP CPI 2.4% vs. 2.6%
EU Trade Balance 11.0B vs. 8.2B

North America:
USD PPI 8:30
USD Core Retail Sales 8:30
USD Business Inventories 10:00

A quiet rangebound night for most of the major currencies tonight with all the action centered on the crosses as euro fell against the yen on profit taking but firmed to fresh yearly highs against the Swiss franc as periphery yields continued to compress.

In Asia the USD/JPY tumbled hard after comments by the Eco Minister Akira Amari sparked a sharp profit taking selloff in midday Tokyo trade. Mr. Amari stated that Japan’s economy faces excessive risks from the rapid depreciation of the yen signalling that Japanese officials may now feel that it has reached appropriate levels. The yen has depreciated by more than 3% this year and came within 30 points of reaching Prime Minister Abe’s goal of 90.00 exchange rate.

Mr. Amari’s words sent USD/JPY tumbling to a low of 88.61 dragging EUR/JPY to 118.27 after it stalled at the 120.00 level yesterday. By morning European trade however, the profit taking flows had settled and both pairs stabilized into the London open session.

In Europe the better than expected EU trade data and strong Spanish auction helped lift the EURUSD to 1.3388, but the pair came off the highs for technical reasons as EURCHF cross pushed to fresh yearly highs near the 1.2400 level. European trade balance improved to 11.0B versus 8.2B eyed as data from France, Italy and Belgium helped to record a record surplus for the region. The news bodes well for the chances of recovery in the EZ as it suggests that the export sectors remain robust despite the recessionary conditions across much of the continent.

In addition the Spanish auction results showed strong investor demand with the country selling 5.7 Billion EUR worth of 12-18 month notes all below the key 2% mark. The 12 month paper saw a yield of 1.472% while 18 month went out at 1.687%. The results were markedly better than the period prior when Spain paid 2.778%, demonstrating renewed investor confidence in Spanish sovereign debt which in turn should continue to lower financing costs for EU periphery and allow the region to recover this year.

That sense of investor optimism regarding the strength of the European financial system is translating into another banner day in EURCHF. The pair once again rose to fresh year to date highs coming just short of the 1.2400 figure in morning European trade as the “euro fracture” continues to unwind. The rally in EURCHF has been exceedingly sharp indicating that it is being driven by short covering flows. However, the breakout appears to be real as investor sentiment has clearly shifted and after some consolidation the pair is likely to continue its rally targeting 1.2500 over the medium term horizon.

In North America today the economic focus will be on US Retail Sales data with markets anticipating a slight pickup to 0.2% from 0.0% the month prior. If the data surprises to the upside it could spur another rally in risk as it will demonstrate that the US economy continues to operate well despite the political uncertainty that surrounds the latest debt ceiling negotiations. That could offer investors hope that global growth will continues in 2013 irrespective of the posturing in Washington DC.

Boris Schlossberg
Managing Director

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