Euro Stabilizes But Remains Weak

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Market Drivers November 13, 2012
EZ periphery yields pressure Euro early
Greeks miss target on T-bill auction
Nikkei – 0.18% Europe -0.77%
Oil $85/bbl
Gold $1726/oz.

Europe and Asia:
JPY Industrial Production -4.1% vs. -4.1%
EUR German ZEW Survey (Economic Sentiment) -15.7 vs. -9.9
GBP RICS House Price Balance -7% vs -15%
GBP CPI 2.7% s. 2.3%

North America:

Risk FX was mixed in early European dealing with euro trading weaker than its counterparts as concerns over the credit crisis and the growing sense of recession in the region weighed on the unit keeping it below the 1.2700 level for most of the Asian and European trade. In Brussels the EcoFin ministers struggled with resolving the bailout issue for Greece but have yet to reach a definitive conclusion, meanwhile Greece was unable to auction the full 5 Billion euros needed to stop gap the financing until the next bailout tranche arrives.

Still officials were confident that a deal would be struck by next week and both German and French finance ministers tried to sound a note of unity on the matter. That helped the stabilize the euro at 1.2680 level but the pair remains vulnerable to more selling as the day proceeds.

On the economic front the news offered no solace to euro bulls as both French labor data and the German ZEW survey missed their mark. In France the payroll employment numbers printed worse than expected at -0.3% versus -0.2% eyed. This was the worst reading in more than 18 months and the third month of contraction out of the past four. The news bodes badly for EZ second largest economy as it continues to teeter on the edge of recession.

In Germany the ZEW survey came in at -15.7 versus -9.9 eyed as investor sentiment degraded after improving the month prior. The weak reading is a clear signal that Germany cannot decouple from the rest of Europe and therefore remains vulnerable to a recession in 2013 as well.

However, perhaps the greatest stress to risk FX was coming from the credit markets where periphery yields were starting to tick up once again. Italian yields on the benchmark 10 year were at 5.04% while Spanish bond yields were at 5.96% – dangerously close to the psychologically important 6% barrier. If credit markets continue to sell off the downside pressure on the EUR/USD will increase with shorts eyeing the 1.2650 and perhaps even the 1.2600 handle as the day progresses. The policy paralysis amongst EZ leaders in combination with deteriorating economic data is clearly starting to weigh on the euro.

Boris Schlossberg
Managing Director

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