Euro Falls as Profit Taking Accelerates

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Market Drivers January 3, 2013
Chinese services PMI post best gain in 4 months
GE jobless rises less than expected 3K vs. 11K
Nikkei closed, Europe -0.38%
Oil $92/bbl
Gold $1685/oz.

Europe and Asia:
CHF KOF Swiss Leading Indicator 1.28 vs. 1.29
CHF SVME Purchasing Managers Index 49.5 vs. 48.7
EUR German Unemployment Change 3K vs. 11K
EUR German Unemployment Rate 6.9%
GBP Purchasing Manager Index Construction 48.7 vs. 49.6

North America:
USD ADP Employment Change 8:15
USD Initial Jobless Claims 8:30
USD FOMC Minutes 14:00

The euro was lower in European trade despite slightly better German labor data as the pair continued to see profit taking flows after yesterday’s sharp run up in the aftermath of the passage of the Fiscal Cliff deal. Currency markets were generally quiet but had a slight risk off bias as the enthusiasm over the US budget deal began to fade and investors started to focus on economic data as well as the looming US debt ceiling battle which could create even more turbulence than the just passed Fiscal Cliff negotiations.

On the economic front the German jobless data printed a bit better than forecast with unemployment rolls increasing by only 3K versus 11K eyed. The unemployment rate remained at 6.9% unchanged from the month prior. The labor data from Europe’s largest economy continues to show mild weakness, but so far conditions have remained generally stable indicating that Germany’s economy may be able to avoid contraction in Q1 of this year.

The EUR/USD initially rose above the 1.3150 level in the aftermath of the news but the rally quickly faded as the pair dipped below that level in mid-morning European trade. The pair remains under selling pressure and continues to underperform on the crosses as market concerns about EU growth in Q1 of this year weigh on the unit. Yesterday’s reversal at the 1.3300 level also created a very negative technical condition as the pair carved out a triple top turning short term bias to the downside for the time being.

Elsewhere, news from China was more upbeat with services PMI surprising to the upside as it hit a four month high rising to 56.1 versus 55.6 the month prior. This was the best reading since September of last year and the tenth consecutive month that the service sector PMI remained above the 50 boom/bust line suggesting that the Chinese economy may have stabilized with economists predicting that overall GDP growth rate in Q4 of this year increased to 7.8% from 7.4% the quarter prior.

As China begins its shift towards more consumer led rather than export led growth the country’s services sector is likely to take on more importance in the overall growth composition. Today’s data highlighted the importance of retail and lodging industries in the country’s growth plans and indicated that consumer demand remains relatively robust.

Chinese as well as Japanese markets remain closed for New Year’s holidays leaving trading in Asia relatively thin but the positive news helped to keep the AUD/USD bid with the pair remaining near the 1.0500 through most of Asian session trade.

In North American trade today the focus will turn to the ADP data due at 13:15 GMT with market anticipating a gain of 134K versus last month’s reading of 118K. ADP has been spotty as a forecaster of the key NFP data due this Friday, but any print below 100K or above 150K will likely move the market as traders position for US payrolls at the end of the week. The US economy remains the absolute key to the risk trade and if the ADP release disappoints it will likely trigger further profit taking as the day proceeds with EUR/USD falling through the 1.3100 level.

Boris Schlossberg
Managing Director

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