Euro Holds an Uneasy Truce at 1.2900

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Market Movers September 25, 2012
Merkel – no transfer without control
Euro treads water as 1.2900 remains equilibrium
Nikkei up 0.25% Europe -0.30%
Oil at $92.44/bbl
Gold $1770/oz.

Europe and Asia:
CHF UBS Consumption Indicator 1.03 vs. 1.48
EUR German GfK Consumer Confidence Survey 5.9 vs. 5.9
GBP BBA Mortgage Approvals 30.5 vs. 28.4

North America:
USD Consumer Confidence 10:00
USD House Price Index 10:00
CAD Retail Sales 8:30

The euro spent most of the early morning European trade churning around the 1.2900 level with market locked in a state of uneasy equilibrium as traders awaited further progress on Spain and Greece amidst a very sparse economic calendar. Spain auctioned off 3 and 6 month bills at rates slightly higher than the prior auction on August (1.25% vs, 0.988%) but still within a level of comfort for the Spanish government which has seen its funding costs decrease markedly since ECB announced its OMT program.

One of the ironies of the ECB announcement last month was that it calmed the periphery debt markets without the need for any policy action and as a result lowered the cost of financing for Spain, allowing the Rajoy government to postpone any formal request for a bailout. However tensions in Spain persist with concerns over a possible split by the Catalonia region stoking geopolitical tensions in the region. Meanwhile the ongoing debate over the future of Greece in EMU is also affecting investor sentiment as Europe’s weakest link continues to run much larger than forecast fiscal deficits and will require additional bailout funds that few EU members are willing to grant.

Amidst these factors the downgrade of economic growth by both the IMF and S&P overnight did not help matters at all and pushed the pair back below the 1,2900 level as risk appetite remained subdued. On the economic front the sentiment survey across the region remained stable but at depressed levels in September as policy efforts by the ECB and EU fiscal officials to deal with the sovereign debt crisis appeared to have eased tensions in the region.

In Germany the GFK survey printed at 5.9, the same level as the month prior but bit lower than the market expected. A gauge of economic expectations rose to -17.2 in September from -18.9 in August, indicating that consumers are a bit more optimistic going into the crucial Christmas season. On the other hand the index measuring income expectations dropped to 23.9 from 31.6, GfK said. A measure of willingness to buy remained at 33.1. Overall the consumer picture remains steady but cautious in Germany.

Meanwhile in Italy consumer confidence rose ever so slightly to 86.2 from 86.1 but not far off the historic lows of 85.7 and in France the manufacturing survey upticked to 90 from 89. The overall reading of sentiment in the region suggests that some sense of calm has emerged in Europe but it remains tenuous at best as officials continue to deal with simmering problems in the periphery.

In North America today the calendar carries consumer confidence figures and Richmond Fed data as well as Canadian Retail Sales which could surprise to the downside given the weakness in Wholesale figures. USDCAD has been holding ground below the .9800 level but if the data from Canada begins to weaken as price of oil decline to $90/bbl – the pair may start to inch its way back towards parity as the quarter proceeds.

Boris Schlossberg
Managing Director

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