Draghi Drags Euro Higher, But Will the Bounce Hold?

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Midday Market Drivers for March 7, 2013
Draghi optimistic – euro bounces to 1.3100
BOE leaves rates unchanged cable snaps higher
Nikkei 0.30% Europe 0.46%
Oil $90.70/bbl
Gold $1589/oz.

Europe and Asia:
AUD AiG Performance of Construction Index 45.6 vs. 36.2
AUD Trade Balance -1.06B vs. -0.51B
JPY Leading Index 96.3% vs. 96.2%
EUR ECB Rate Decision
EUR ECB Deposit Facility Rate
EUR German Factory Orders -1.9% vs. 0.6%
GBP BOE Rate Decision
GBP BOE Asset Purchase Target

North America:
USD Trade Balance -44.4B vs. -42.4B
USD Initial Jobless Claims 340K vs. 350K
USD Consumer Credit n/a

Mario Draghi single handedly dragged euro higher today when he put forth a relatively upbeat view of the Eurozone economy pressing the point that the worst may be over for the region and that the process of recovery will start to kick in as the year progresses.

Although Mr. Draghi acknowledged that the most recent “hard data” in the Eurozone continued to point to contractionary conditions he noted that the latest sentiments surveys have seen an uptick in optimism and he stressed that these reports were more reflective of true conditions on the ground. According to Mr. Draghi, the contraction in EZ economic activity is a function of the overhang from Q4 of last year and that demand should slowly pick up over the next few quarters.

Given Mr. Draghi’s generally sanguine outlook the prospects for an ECB rate cut as early as April diminished greatly and the market rallied the EURUSD in response pushing the pair to a high of 1.3116. However, Mr. Draghi also noted that the ECB has lowered its projection for growth in 2013 taking their GDP estimate to -0.9% from -0.1% and curing the 2014 projections to 0%-2.0% range from 0.2%-2.2%.

In short much of Mr. Draghi’s case rests on the assumption that aggregate demand in the EZ will revive in Q2 of this year helping to drive consumer spending and employment growth. One key point that he emphasized is that much of the fiscal budget cutting has been done and therefore will be less of a drag on EZ growth as the year proceeds.

So far however, there is little hard evidence to support Mr, Draghi’s optimism. The latest points from the EZ including today’s horrid German Factory order numbers show that the contraction is steepening not stabilizing. Therefore, the rally in the EUR/USD may prove to be fleeting if the EZ economic data does not show some signs of improvement relatively soon. For now the EUR/USD appears to have support near the 1.3000 level but that support won’t last if the data does back up Mr. Draghi’s positive prognosis.

Boris Schlossberg
Managing Director

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