A Quiet Night of Grind in FX

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Market Drivers Oct. 10, 2012
Asian equities sell off sharply on mixed QE3 earning, worries on China slowdown
French and Italian IP rebounds in August suggesting stabilization
Nikkei off -1.98% Europe -0.11%
Oil at $91.88/bbl
Gold at $1764/oz.

Europe and Asia:
AUD Westpac Consumer Confidence 1.0% vs. 1.6%
JPY Machine Orders -3.0% vs, -2.7%
French IP 1.5% vs. -0.2%
Italian IP 1.7% vs. -0.5%

North America:
USD Beige Book 14:00

A very quiet night of trade in FX with high beta currencies tracing out very narrow ranges in Europe after slipping lower in Asian session trade. In Asia, equities sold off hard with Nikkei down nearly -2%, Kospi off -1.5% on mixed Q3 earnings picture and fears of further slowdown in Chinese demand.

As some analysts have pointed out the stark contrast between Alcoa which lowered its guidance and YUM brands which beat expectations indicates that Chinese economy may be bifurcating with industrial sector losing momentum while consumer growth continues to expand. Unfortunately given the fact that consumer only represents 30% of the Chinese economy, this suggests that Chinese growth will slow to below 8% level next year.

The prospect of slowdown in China, along with the ongoing sovereign debt crisis in Europe and the upcoming fiscal cliff problems in the US budget represent the triumvirate of risks facing the global economy and is the primary reason for such lethargy in the financial markets as traders await the resolution of these issues.

In the meantime the economic calendar in Europe remains very quiet with only French and Italian Industrial production data on the docket. Both numbers handily beat expectations rebounding by 1.5% vs. -0.2% eyed and 1.7% vs. -0.5% forecast respectively. The news helped to stabilize risk assets with EURUSD recovering off session lows to trade back to 1.2865, but it unclear if the jump in manufacturing was simply the result of the volatility of the dataset or a genuine stabilization in demand.

Elsewhere Italy was able to auction off 1 year T-bills with better bid to cover ratio but a noticeable increase in yield to 1.94% from 1.69%. The rise in yields suggests that fixed income markets are back to expanding risk premia to periphery debt as EZ policy makers continue to dither.

In North America today the calendar is nearly barren with only the Beige book on the docket. Trading therefore could remain listless for the rest of the day in the absence of any fresh newsflow and FX will likely continue taking its cues from equities. For now the EURUSD appears to have found support near the 1.2850 level with BIS reportedly buying near that barrier but if risk aversion flows accelerate into the North American session it may revisit those lows as the day proceeds.

Boris Schlossberg
Managing Director

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