Euro Drifts Lower As Italian Politics at a Standstill

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Market Drivers for March 6, 2013
AU GDP in line helps lift Aussie above 1.0300 briefly
Bersani no courting Grillo – EURUSD still capped at 1.3080
Nikkei 2.13% Europe 0.47%
Oil $90.62/bbl
Gold $1574/0z.

Europe and Asia:
AUD GDP 0.6% vs. 06%
EUR Euro-zone GDP -0.6%
EUR Euro-zone Household Consumption

North America:
USD ADP Employment Change 8:15
USD Factory Orders 10:00
USD US Fed Releases Beige Book 14:00
CAD BOC Rate Decision 10:00
CAD Ivey PMI 10:00

A very quiet night of trade in FX today as currencies traced out very narrow ranges in listless dealing with no fresh news to move the markets. Euro once again failed to clear the 1.3080 level and then quickly fell into 1.3030’s after the release of EZ GDP showed exports saw their biggest fall since Q1 of 2009 and comments from Bresani offered no hope of a solution to the Italian election quagmire.

Cable was also weaker on the night slipping below the 1.5100 mark as traders reacted to Parliamentary testimony of outgoing BOE Governor Mervyn King who admitted that too big to fail was still the primary problem facing UK banking while also noting that he would like to see leverage ratios reduced to 10-20 level. Such sharp reductions would cause a significant contraction in UK credit creation and FX markets reacted negatively sending pound to a low of 1.5070.

The price action in cable must be of great concern to the bulls. The pair failed to hold the 1.5200 level yesterday despite better than expected UK PMI Services report and ended near the day’s lows. Today’s selloff further into the 1.5000 territory indicates that investor sentiment towards sterling remains resolutely bearish and suggests that we may see another possible run at the 1.5000 level before the end of the week.

Meanwhile the Aussie continued to display relative strength rising to a high of 1.0300 in late Asian trade after Australian GDP came in line with projections. Australian Q4 GDP printed at 0.6% on a q/q basis and recorded a very respectable gains of 3.1% on a year over year basis. The data showed that despite the recent slowdown in activity, Australian economy remains one of the better performers in the G-20 universe.

The Aussie which made a spike bottom near the 1,0100 level on Monday continued its recovery today, but ran it resistance near the 1.0300 level. Still the pair appears to have stabilized after Retail Sales and GDP reports this week assuaged investor concerns about the slowdown in economic activity Down Under and removed any speculation that the RBA will lower rates further in the short term.

The EUR/USD continued to drift lower as the European morning progressed with Italian political situation still mired in a deadlock. Bersani dismissed the possibility of putting together a coalition government with Berlusconi and admitted that in his present state he could not guarantee stability in Parliament. While Italian politics remains at standstill it is difficult to imagine how Euro could get any upside traction. The pair has been trapped in a very narrow range this week as markets await some sort of resolution in Rome.

In addition the widening gulf between US and EZ growth rates may have changed the key dynamic in the pair with the dollar now seen as a possible risk currency rather than just a repository of safe harbor funds. Therefore positive US news may now favor the buck and push the EUR/USD further down even if the situation in Europe stabilizes.

In North America today the calendar is relatively quiet but the early focus will be on the ADP report with market looking for a print of 172K versus 192K the period prior. However, if the data comes closer to the 200K mark it could provide another boost for the dollar offering yet another confirmation of US relative strength.

Boris Schlossberg
Managing Director

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