Does Weaker IFO Play into Draghi’s Hands?

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Market Drivers Jan 25, 2016

Oil flips and risk currencies sink
EZ IFO misses forecasts
Nikkei 0.90% Eurostoxx -0.33%
Oil $31/bbl
Gold $1103/oz

Europe and Asia:
AUD NAB Business Confidence 3 vs. 5
EUR EZ IFO 107.3 vs. 108.5

North America:
No Data

FX opened for the week with a slight risk on bias as oil prices held their gains, but as the night wore on crude started to slide again and started dragging equities and risk lower lower as well. Overall however it was a rather muted start to the week with EUR/USD contained within a 50 pip range while USD/JPY failed to take out the 119.00 figure and dropped back to 118.00 support.

On the economic front the only release of note was the IFO survey which missed on all fronts. The current assessment reading came in at 112.5 versus 112.8, business climate printed at 107.3 versus 108.4 and business expectations declined to 102.4 from 104.1 eyed.

This was the lowest IFO reading in more than 6 months and the biggest one month drop in more than a year, as sentiment in the German corporate sector has clearly deteriorated. IFO noted that it has an ambivalent view of the German economy saying that the country can not detach itself from the turmoil in emerging markets.

The slowdown in Germany actually increases the odds of some sort of ECB easing in March. Generally German monetary authorities tend to be the most conservative policy makers in the Eurozone with finance minister Schauble and BUBA President Weidmann constantly criticising Mr. Draghi’s efforts at stimulus. However, with EZ largest economy clearly showing signs of slowdown any opposition to Mr. Draghi’s efforts at more QE may fall by the wayside.

The EUR/USD showed little reaction to the news with the pair trading around 1.0825 by mid morning European dealing. For now the euro continues to be driven primarily by risk on/risk off flows but if Mr. Draghi’s warning about possible further stimulus in March comes through the downward pressure on the unit will continue as the winter wears on and the pair could test its long term lows near the 1.05 figure.

In North America today the calendar is quiet with no data on the docket, so flows once again are likely to be dictated by the dual macro factors of oil and equities. After a few massively volatile weeks, crude appears to have carved out a bottom for now and if it can hold the lows we expect the volatility in the contract to begin to taper off which in turn is likely erode some of the cross market correlation that we have seen since the start of the year.

Boris Schlossberg
Managing Director

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