Euro Eyes 1.3000 Into the Weekend

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Market Drivers October 12, 2012
Rumors of Spain bailout over the week-end, China RRR cut spur risk flows
Nikkei -0.15% Europe -0.15%
Oil $92/bbl
Gold $1770/oz.

Europe and Asia:
JPY Tertiary Industry Index 0.4% vs. 0.5%
EUR Eurozone Industrial Production

North America:
USD PPI 8:30
USD U Mich Confidence 9:55

Risk FX was higher in early European trade today amidst a swirl of rumors that helped to lift EURUSD to a high of 1.2985 as buying from Middle East and the BIS caused a sharp spike in the pair. FX markets were full of speculation that Spain may ask for a formal bailout as early as this weekend, although there was absolutely no confirmation from official sources of such a move. In addition rumors also circulated supposedly from an official at the IMF meeting stating that China may lower it RRR rate once again.

Amidst absence of any significant news, such rumors helped to buoy risk currencies on the final trading day of the week as EURUSD remained within striking distance of the 1.3000 level. Although Spain is not yet ready for a formal bailout request the market believes that it is just a matter of time and the sovereign is reflecting this positive sentiment as yields on the benchmark Spanish 10 year continued to move lower today.

On the economic front the news was relatively positive with EZ Industrial Production rising by 0.6% in August versus forecasts of -0.4% drop. The year on year figures still showed a contraction of -2.9% but the report was just the latest data point to suggest that EZ manufacturing may have bottomed out in August which would bode well for the regions economy going into the year end.

Elsewhere in Japan EcoFin Minister Maehara stated that forex intervention was an important MOF prerogative as he tried once again to jawbone USDJPY higher. The pair remains near yearly lows despite stronger than expected labor data out of US last week and yesterday’s much better than forecast weekly jobless claims numbers. The market continues to be dubious about the prospect of US economy acting as an engine for global growth and is still concerned about the fracture of the EZ which is seen as the greatest recessionary risk in 2013.

Therefore it appears that only a meaningful long term resolution the EZ sovereign debt crisis in combination with sustained US growth will lift USDJPY out of its current malaise. On both fronts there is perhaps small cause for optimism as many market observers believe that Spain will ask for formal bailout in the near future thus mitigating default risk while US economy continues to gain momentum albeit at a slow pace.

Today’s University of Michigan sentiment survey will be the primary economic catalyst in North American session and if the data confirms the recent improvement on the labor front it may push USDJPY through the 78.50 back towards 79.00 as case for growth begins to build. Meanwhile if US equities trade higher, the overall bid tone in risk could help EURUSD as well with the pair targeting the key 1.3000 level as the week comes to a close.

Boris Schlossberg
Managing Director

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