Risk FX Rally Stalls in Quiet Trade

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Market Drivers July 26, 2012
Quiet night as EUR/USD meets resistance at 1.2150, EU earnings mixed
German inflation at 3 year low
Nikkei up 0.92% Europe -0.28%
Oil at $88/bbl
Gold at $1607/oz.

Europe and Asia:
NZD RBA Rate Decision 2.5%
EUR German Gfk Consumer Confidence Survey 5.9

North America:
USD Durable Goods 8:30
USD Pending Home Sales 10:00

It’s been an extremely quiet night of trade in the currency market with risk FX short covering rally from yesterday running out of gas in early European trade amidst a mixed equity environment and lack of any fresh news. European stock were off mildly trading down -0.3% on the day as earnings results continued to be uneven with Q2 data clearly indicating a slowdown in economic activity for many multinationals.

The economic calendar, reflecting true summer doldrums, was basically barren with only German GFK consumer confidence and Import prices on the docket. Consumer confidence improved mildly to 5.9 from 5.8 the month prior, confirming yesterday’s assessment from the IFO institute that private spending in Germany has remained surprisingly robust despite the credit woes in the EZ region.

German import price fell for the third month in a row on the back of declines in energy prices, bringing annual inflation level to their lowest levels since 2009. The annual rate declined to 1.3% well below the 2% target rate of the ECB indicating that price pressures in Europe’s largest economy are now non-existent.

The sharp decline in crude prices which have fallen 14% off their highs, were the primary factor in lowering the rate of inflation, but even without the petroleum component price gains remained well contained at 1.6% per year. The news may provide further scope for ECB to ease monetary policy with central bank now able to cut rates yet another 25bp to an all-time low of 50bp, but markets remain skeptical as to the efficacy of any further rate reductions and would prefer a much more aggressive stance on LTRO from the ECB.

The euro has stalled at the 1.2150 level and Aussie hit resistance at 1.0350 as the risk FX short covering rally looks to be on pause for now with European traders waiting for North American market open before making any further directional bets. Yesterday’s gains were clearly a function of profit taking and short covering after days of relentless selling, but the rally may not be over if risk sentiment improves during North America dealing. With positioning still highly skewed against it, the Euro may need a few more days to work off its oversold condition.

The North American calendar today carries Durable Goods and weekly jobless claims, with the weekly number likely to be key to sentiment in early trade. Over the past month the jobless claims data has moved in the wrong direction climbing back towards the 400K level. The seasonal adjustments over the past few weeks have skewed the results, so today’s report could provide a clearer picture of labor demand. If the numbers continue to move uncomfortably close to the 400K level the news will likely weigh on risk and could push the EUR/USD back below the 1.2100 level. However, if the data shows some improvement, the short covering rally could extend and send the pair towards 1.2200 as the day progresses.

Boris Schlossberg
Managing Director

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