How Long Can Euro Strength Last?

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Market Drivers September 30, 2015

Euro data misses the mark
UK Final GDP in line
Nikkei 2.70% Europe 2.42%
Oil $45/bbl
Gold $1124/oz

Europe and Asia:
AUD Building Approvals -6.9% vs. -1.8%
EUR GE Retail Sales -0.4% vs. 0.2%
EUR GE Unemployment 2K vs. -5K
GBP UK GDP 0.7% vs. 0.7%
EUR Flash CPI -0.1% vs. 0.0%

North America:
USD ADP 8:30

USD Chicago PMI 09:45

Dollar found some love in early European trade as risk flows helped push both the Nikkei and Eurostoxx 50 by more than 2% which lifted USD/JPY above the 120.00 level. All focus today however will remain on the ADP report due at 12:30 GMT as it will provide a key clue to the all important NFP report due Friday.

Meanwhile the data out of Europe was less than stellar as almost every EZ report missed its mark. In Germany Retail Sales printed at -0.4% vs. 0.0% eyed , French consumer spending was also lackluster at 0.0% versus 0.4% forecast and and German unemployment ticked up to 2K from -5K projected.

The German employment situation could get a lot worse if the VW emissions cheating inquiry leads to sharp fall off in demand for the automakers products. VW employs more than 270,000 workers in Germany and is one of the country’s largest corporations. It’s unclear whether the combination of fines and market pressure will result in layoffs at VW, but the probability of some cutback appears highly likely and for now the market has yet to price in such a scenario.

Finally the EZ Flash CPI data also missed its mark printing negative for the first time since March indicating that deflationary pressures remain in place. The news suggests that ECB QE program will remain in place for some time to come and is likely to act as an anchor on the unit for the foreseeable future.

The euro has been remarkably resilient and even today remains above the 1.1200 level despite the disappointing results. For now the market is willing to look past the data and in fact is focusing more on dollar economic news and risk aversion flows, but eventually the disparity between the EZ and US economies is likely to exert a downward pressure on the pair. Although EZ economy – especially in the periphery – is starting to recover, the core has become much weaker over the past few weeks. The slowdown in China and Middle East along with domestic corporate scandals and the new refugee crisis have all created a series of pressure points which the German economy may not be able absorb and once the market begins to appreciate that fact the pair could head below the 1.1000 level.

For now the focus remains on US eco news and as such the ADP report looms large. Any print above 200K will likely help the greenback with USD/JPY likely pushing towards 120.50 level as traders become more and more convinced that a rate hike is coming.

Boris Schlossberg
Managing Director

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