Better IFO Fails to Lift the Euro

Posted on

Market Drivers Feb. 22, 2013
IFO beats big but Euro bounce tepid
RBA’s Stevens more upbeat than expected
Nikkei 0.68% Europe 1.02%
Oil $93.12/bbl
Gold $1580/oz.

Europe and Asia:
NZD Credit Card Spending 0.4% vs. 4.5%
EUR European Commission Releases Economics Growth Forecast
EUR German GDP -0.6% vs. -0.6%
EUR German IFO – Business Climate 107.4 vs. 104.9
EUR German IFO – Current Assessment 110.2 vs. 108.5
EUR German IFO – Expectations 104.6 vs. 101.4
EUR Euro-zone CPI

North America:
CAD CPI 8:30
CAD Bank of Canada CPI 8:30
CAD Retail Sales 8:30

The IFO survey of business sentiment rose to a 10 month high beating market forecasts, but the reaction in the currency markets was decidedly muted with EUR/USD rising only to 1.3225 as traders kept their eyes on the upcoming Italian election. The IFO beat on all fronts with business climate sentiment rising to 107.4 from 104.9 eyed, current assessment increasing to 110.2 vs. 108.5 and expectations improving to 104.6 vs. 101.4.

The news however could not budge EUR/USD much higher as the pair initially rose to 1.3245 only to fall back towards the 1.3200 level by mid morning European trade. There were several factors that weighed on the unit. The upcoming Italian election this weekend continues to concern the market, as there appears to be no clear frontrunner in the race and the emergence of comedian turned politician Beppe Grillo has sent shivers through the political establishment.

Yet perhaps more troubling than the Italian election is the nagging disconnect between the relatively upbeat sentiment readings and the dour economic data that continues to come out of the EZ. The latest EU Commission growth projections released right after the IFO indicated that growth in Europe will be an anemic 0.1% in 2013 and for the EZ specifically will contract by -0.3%. The release of those projections sent EUR/USD right back to the 1.3200 level at the prospect that the region will contract for the second year in a row.

For now the EUR/USD appears to have found support at the 1.3160 level as it tries to consolidate its recent losses, but the downturn in the pair is not over. If the data next week continues to disappoint the pair could drift closer to the key psychological level of 1.3000 as the quarter proceeds.

Elsewhere in Australia RBA Governor provided generally upbeat testimony in front of the Australian Parliament spurring a rally in AUD/USD and surprising the currency market which expected him to assume a more dovish stance given the recent slowdown in the economy. “Overall,” Mr. Stevens noted, “there is a good deal of interest rate stimulus in the pipeline. At its meeting earlier this month the board judged that it was sensible to allow it time to do its work.”

In relation to China Mr. Stevens also sounded relatively sanguine. “The medium-term outlook for China is for a less hectic pace of growth than we saw on average over the past decade,” he said, but added that because the Chinese economy is now so much bigger, even less rapid growth is of global significance and important to Australia.

Many market analysts however have questioned the assumption that future Chinese growth may not necessarily translate into additional demand for Australian products if China rebalances it economy away from investment and production and more towards consumption and services. Under such conditions, the Australian economy with its high exchange rate may prove uncompetitive creating further problems in growth.

Nevertheless, Mr. Steven’s upbeat tone and suggestion that the series of interest rate cuts have yet to have full impact on Australian economic demand, surprised the market because it indicated that the RBA may be more cautious in loosening monetary policy further. Many analysts have called for an additional 50 basis points in cuts in 2013, but Mr. Steven’s testimony suggested that the RBA was in no hurry to initiate such policy in the near term.

The Aussie bounced off its year to date lows as result, rising to a high of 1.0324 in afternoon Asian session trade as shorts covered their bets. With no major data in North America today the unit is likely to maintain its gains and it looks to have put in near term bottom for now. However the Aussie remains vulnerable to any further negative economic news from Down Under and could resume its downtrend if the data does not support the RBA’s upbeat view.

Boris Schlossberg
Managing Director

Leave a Reply

Your email address will not be published. Required fields are marked *