IFO OK But EURUSD Capped on Fears About China

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Market Drivers for June 24, 2013
Worries about liquidity in China send Asian stocks lower, AUDUSD tests 9150
IFO basically in line creating minor selloff in EURUSD
Nikkei -1.28% Europe – 1.12%
Oil $93/bbl
Gold $1280/oz.

Europe and Asia:
EUR German IFO – Business Climate 105.9 vs. 105.9
EUR German IFO – Current Assessment 109.4 vs. 109.6
EUR German IFO – Expectations 102.5 vs. 102

North America:
Chicago Fed National Activity Index

Asian markets were destroyed on the first trading day of the week with Shanghai index particularly hard hit as it dropped by -5.3% as investors continue to worry that Chinese policy makers will maintain their hawkish bias on monetary policy tightening credit supply further. Short term interbank lending rates in China have surged as the government continues to appear non plussed by the liquidity tightening.

The rise in risk aversion during the Asian session took its toll on AUD/USD once again with pair making fresh lows as it tested the 9150 barrier. The one way trade in Aussie continues with the shorts now eyeing the psychologically key .9000 level – and if the selloff in Chinese assets continues as the the week proceeds – that target may be reached within the next several days.

The economic slowdown in China is now acting as the key counterpoint to the improvement in US economy activity and the imbalance in growth between the two worlds biggest economies is likely to become the key market theme as the summer proceeds. It is simply impossible to imagine sustained global growth with US acting as the solo locomotive for demand. Therefore this divergence in performance between the world biggest economies is likely to cause more panic amongst investors, accelerating risk aversion flows unless some improvement is seen.

The goldilocks scenario for global growth would entail a soft landing in China, a quickening recovery in Europe and an acceleration of activity in US. But such a bullish outcome is clearly being doubted by the market and if US begins to falter as the summer proceeds risk assets will come under enormous pressure as investors pare back their bets.

The threat of China slowdown was even evident in the EUR/USD trade today. The IFO sentiment survey was generally in line with expectations, with the forward component even beating consensus by a bit. But EUR/USD failed to rally off the news, as investors remain concerned about German exports to China. With exports the key driver of growth in the economy, market participants are greatly concerned that German recovery could sputter badly if demand from China begins to collapse. The pair made a half hearted attempt to rally through 1.3125, but has met selling at those levels throughout the morning European dealing session.

In North America today the calendar is barren and equity markets may see some selling pressure on the open as traders digest the overnight activity in Asia. The EUR/USD remains under pressure and any further selloff could create a test of the 1.3050 level as the day proceeds. However, if there little follow through to the selloff in Shanghai, the pair could stabilize and try to stage a short covering rally towards 1.3150 as consolidation continues.

Boris Schlossberg
Managing Director

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