Dollar in Demand as EZ Growth Slows

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Market Drivers for August 6 2014

NZD sells off further as employment data disappoints

Nikkei -1.05% Europe -0.57%

Oil $97/bbl

Gold $1292/oz.

Europe and Asia:

NZD Employment 0.4% vs. 0.7%

NZD Unemployment Rate 5.6& vs. 5.8%
EUR German Factory Orders -3.2% vs. 0.5%
EUR Retail PMI 47.6 vs. 50.0

North America:

USD Trade Balance 08:30

CAD Trade Balance 08:30

Both euro and cable continued to sink in early European trade today as economic data from the region missed its mark suggesting further slowdown in activity. In Europe the German Factory orders gauge slipped to -3.2% versus 0.5% eyed sending the pair down to a test of 2014 lows.

The continued pressure from the crisis in Ukraine is clearly starting to take its toll on German industry as business sentiment sours and demand wanes. The drop in Factory orders was the worst decline in three years suggesting that growth in German manufacturing sector is likely to contract materially this month.

German consumer demand is also likely to falter as Retail PMI data declined sharply as well. EZ Retail PMI printed at 47.6 versus 50.0 with German component dropping to 52.1 from 56.2, The gauge remains in expansionary territory but is clearly slowing.

Today’s data indicates that overall EZ growth may be moving back to zero with periphery economies such as Italy already back in recession. If Germany, which is the locomotive of the region, is unable to revive demand in the foreseeable future, the ECB may be facing a much greater policy challenge in H2 of this year and may be forced to expand its extraordinary measures far beyond its initial intent.

The EUR/USD dipped below the 1.3350 level matching its 2014 lows, but quickly found some buyers in that area and rebounded to 1.3365 my mid morning dealing. The unit however, remains under tremendous pressure and so far has not provided any reason for a short covering rally and thus could slip further towards 1.3300 as the day proceeds.

In UK meanwhile the Industrial Production and Manufacturing production data both missed their mark with the former coming in at 0.3% vs. 0.6% eyed and later printing at 0.3% versus 0.7% forecast. Manufacturing output slowed to only 0.2% growth on a 3 month basis versus 1.1% the period prior.

Cable was slammed to 1.6830 and remained near the session lows as the prospects for an early BoE rate hike grow dimmer and dimmer with UK growth appearing to have peaked earlier this year. With demand in Europe slowing down significantly and financial markets looking like they are about to correct, it is difficult to see how UK economy can recover its growth momentum from the start of this year and that suggests that cable may be in for further decline over the near term.

In US today the calendar is relatively quiet with only Trade Balance data on the docket but price action is likely to take its cue from the equity markets where several prominent takeover deals blew up after the New York close yesterday. Amidst slowdown in global economic activity and a pick up in risk aversion flows, the dollar remains the go to currency for the time being.

Boris Schlossberg
Managing Director

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