Euro Recovers Downgrade Losses

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Market Drivers October 11, 2012
AU employment improves helping risk FX
ECB monthly bulletin – severe distortions in Gov debt markets, OMT necessary, Italian auctions sound
Nikkei 0.07% Europe -0.54%
Oil $91.70/bbl
Gold $1770/oz.

Europe and Asia:
AUD Employment Change 14.5K vs. 5.1K
AUD Unemployment Change 5.4% vs. 5.3%
AUD Consumer Inflation Expectations 2.6% vs. 2.4%
JPY Machine Orders -3.3% vs. -2.4%
NZD Business NZ Performance of Manufacturing Index 48.2 vs. 47.4
EUR German CPI -0.3%
EUR ECB October Monthly Report

North America:
USD Trade Balance 8:30
USD Initial Jobless Claims 8:30
USD Monthly Budget Statement 14:00

Risk FX recovered from its late North American selloff yesterday with EURUSD rising back towards the 1.2900 figure in early European trade as better employment data out of Australia and healthy bond auction from Italy helped buoy risk appetite. Yesterday’s downgrade of Spain by the S&P caught the market by surprise at its thinnest point of liquidity between New and Tokyo interchange caused EURUSD to drop more than 50 points in reaction to the news.

The S&P noted a litany of familiar reasons for its actions, including slower than expected growth and risks of wider deficits in Spain but the question going forward for the market is whether Spain will now be forced to ask for a formal bailout from EU. The ECB stands ready with its OMT program and in today’s monthly bulletin it reaffirmed the fact that there are a severe distortions in the sovereign debt market and that it believes the OMT program is necessary.

As to Spanish officials they remain non-committal for the time being with Spanish officials noting that they were surprised by the S&P decision and strongly disagree with it. We believe that ultimately Spain will seek a formal bailout, but under its own terms that are likely to be more lenient than the prior packages. Having seen the ravages of austerity in other periphery economies, Spanish officials are unlikely to agree to any further cuts even as they seek ECB financing and given Spain’s size they are much more likely to achieve their goals.

Meanwhile on the economic front, the employment data from Australia proved to be a positive surprise as jobs grew by 14.5K versus 5.1K eyed. This was the second time in three months that employment data beat forecasts suggesting that the labor situation Down Under is healthier than the market thought despite the clear economic slowdown in the region.

Australia’s unemployment rate came in at a seasonally adjusted 5.4 percent in September compared to 5.1 percent in August. Economists had expected a more modest increase in the jobless rate to 5.3 percent but the rise was due to increase in the participation rate which rose to 65.2 percent, topping expectations for 65.0 percent.

In a further sign of strength of the report the number of full-time jobs advanced by 32,100 in September, and part-time employment fell by 17,700. It remains to be seen however, if today’s robust labor data will persuade the RBA to remain stationary for the time being.

The Aussie responded well to the news rising to a high of 1.0280 in Asian session and may continue to outperform as the day proceeds. Today’s data point was the first bright piece of news out of Australia over the past several weeks and may spur further short covering as traders reassess the chances of additional rate cuts in the region.

In North America today the calendar only carries unemployment claims with market anticipating essentially the same 368K print as last week. Risk assets remain in limbo trading in narrow ranges as markets grapple for the next big theme. For now it appears that consolidation continues to dominate trade as EURUSD meanders between 1.2850-1.2950 while Aussie may see further lift from the jobs numbers as it eyes 1.0300 level.

Boris Schlossberg
Managing Director

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