Dollar Rally Takes a Pause

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Market Drivers for July 8, 2013
GE Trade Surplus weaker than forecast
Troika says Greece program broadly in line but outlook uncertain
Nikkei -1.40% Europe 1.32%
Oil $103/bbl
Gold $1225/oz.

Europe and Asia:
JPY CA 62T vs. 62T
JPY Eco Watchers Survey Current 53 vs. 55.6
CHF Unemployment Rate 3.2%
EUR German Trade Balance 14.1B vs. 17.4B
EUR German Industrial Production n/a

North America:
USD Consumer Credit 15:00
CAD Bank of Canada Senior Loan Officer Survey 10:30
CAD Business Outlook Future Sales 10:30

Its been a quiet session at the start of the week with high beta currencies firming a bit in the European session trade as equities rallied and ECB announced that Troika mission reached staff level agreement on policies needed to keep program on track in Greece. The EUR/USD climbed steadily through morning European dealing to 1.2845 after earlier attempts to run the 1.2800 level failed.

In economic news the German Trade surplus missed its mark coming in at 14.1B versus 17.4B eyed as exports sank by -2.4% while imports rose 1.7% on a month over month basis. The figures from the month prior were revised downward as well to 17.5B from 17.7 billion euros. Although the market disregarded the news, the decline in German trade not bode well for growth in Eurozone’s largest economy and suggests that demand for the country’s critical export sector may cooling in the H2 of this year.

However the fundamental data was overshadowed by the firmer risk sentiment from the equity market and the news on Greece which now looks likely to receive further EZ bailout funds avoiding yet another financing crisis in the region.

Elsewhere in Asia, USD/JPY initially climbed to a high of 101.51 on retail demand at the start of Tokyo trade, but then sold off back to 101.00 on the drop in the Nikkei, only to recover back towards the 101.40 as the European session progresses. The pair received a tremendous boost from Friday’s NFP report which beat the 165K jobs estimate by printing at 195K.

This was the first time in more than a decade that NFPs have generated 100K plus jobs for 12 consecutive months indicating that the US economy is starting to build serious momentum. Market consensus is that the Fed will now begin to taper as early as September with all eyes on this Wednesday’s FOMC notes as traders look for clues from some of the more hawkish members of the board. Even if the Fed remains stationary for a while longer, US yields are likely to rise in anticipation of growth and that should prove constructive for the dollar.

The UST/German Bund spread is already at 7 year highs, and if it continues to expand the dollar rally should extend with EUR/USD likely testing the yearly lows at 1.2700 figure while USD/JPY challenges the yearly highs at 103.50.

With no major reports on the docket today, trading in the currency market could remain rangebound for the rest of the day. Although all the high beta currencies have staged a mild rebound in today’s session, the rallies may be short lived as the week proceeds, especially if US data produces any upside surprises and EZ news continues to disappoint.

Boris Schlossberg
Managing Director

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