All Eyes on ECB

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Market Drivers for October 2, 2013
Euro listless as Letta waits for confidence vote and ECB
Aussie hurt by weak trade data
Nikkei -2.17% Europe -.67%
Oil $101/bbl
Gold $1293/oz.

Europe and Asia:
AUD Building Approvals -4.7% vs. -0.7%
AUD Trade -0.82B vs-0.45B
GBP UK PMI Construction 58.9 vs. 60.1

North America:
USD ADP 8:15
EUR ECB 8:30

It’s been a quiet night in the currency markets as the dispute in DC continues while in Italy Prime Minister Letta appears to have been able to acquire the support of the majority of Silvio Berlusconi’s NPL party to remain in power. The euro was unmoved for most of the Asian and European session as traders await the ECB press conference at 12:30 GMT.

USD/JPY on the other hand continued to weaken further as the pair slipped below the 97.50 level before finding some support. The decline in the pair is driven by rise in risk aversion with Nikkei dropping by more than 2%, but also by the growing unease over the prospect that the US budget impasse may drag into the debt ceiling negotiations and push US into technical default.

The situation in Washington shows no signs of being resolved as both sides look to dig in for a possible showdown over the debt ceiling battle. As we noted yesterday the longer this standoff goes on the more pressure on USD/JPY. If the conflict turns into a constitutional crisis it could send the pair tumbling towards the 95.00 level as the month proceeds.

On the economic front, the calendar is light today, but weak Trade and housing data out of Australia helped reverse some of Aussie’s yesterday’s gains as it showed that economic activity Down Under remains weak.

In UK the Construction PMI missed its mark printing at 58.9 versus 60.1. While this was still a very strong reading, it was the second PMI forecast miss this week suggesting that the economic rebound in UK may be starting to slow down a bit. Tomorrow’s PMI services reading will be key to pound’s near term direction. Having set a spike high at 1.6260 yesterday, the pair may be due for some correction over the next few days.

In North America the ADP report will have to stand in for the NFPs this week with markets anticipating another reading of 170K or so. Given the recent strength in jobless claims it is likely that the ADP will print in line. However the bigger focus today will be on the ECB meeting at 12:30 GMT. With EUR/USD up markedly since the Fed’s decision not to taper it will be interesting to see if Mr. Draghi tries to talk down the unit.

Mr, Draghi has already mentioned the possible restart of the LTRO, but what may really send the EUR/USD tumbling is his focus on interest rates. With inflation well below target the ECB has the scope to ease further and if Mr, Draghi hints that the governing council may be open considering a rate cut the euro could quickly tumble. If on the other hand, Mr. Draghi sticks to the script and downplays the impact of the rising currency the EUR/USD could easily breach the 1.3600 level which has been a solid resistance point for nearly a three weeks.

Boris Schlossberg
Managing Director

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