Euro Firms on First Trading Day of the Week

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Market Drivers August 13th, 2012
Italian 1 year auction places 8B at 2.76% vs. 2.69% – not as bad as feared
Japan GDP misses badly as exports, consumer pull back
Nikkei down -0.07%, Europe -0.08%
Oil at $93/bbl
Gold at $1626/oz.

Europe and Asia:
JPY GDP 0.3% vs. 0.6%
EUR German Wholesales Price Index 0.3% vs. 0.2%

North America:

Euro rallied in Monday morning trade breaking above the 1.2300 barrier in the wake of better than expected Italian auction results and some rebalancing on the crosses. Italy auctioned off 8B euros of 1 year T-Bills with a yield of 2.767% versus 2.697% the period prior. Although yields rose for the sovereign the increase was smaller than anticipated by the grey market which was pricing in a jump of as much as 20 basis points ahead of the auction. As a result investors breathed a sigh of relief spurring a small rally in the euro.

The single currency was especially strong on the crosses with EURGBP rising above .7850 and EURAUD inching towards 1.1700 by mid-morning London trade. European assets have been grossly oversold as evidenced by the latest reports that show that the entire European financial sectors is now smaller than Australia’s – a country with only 1/20th of the population and 1/10th the GDP of the 17 member union. The massive skew in valuation is clearly the result of fears over the possible breakup of the EZ, but it nevertheless demonstrates tremendous disparity in market valuation and no doubt has attracted some flows to EURAUD from value investors looking for a rebalancing in asset prices.

On the economic front the calendar remains in summer doldrums with only German wholesale prices and Japanese GDP on the docket. The data out Japan disappointed with GDP printing at 0.3% versus 0.6% eyed. Exports trimmed -0.1% off the final number while private consumption rose by a tepid 0.1% versus 1.2% in Q1 of this year. Japanese economy continues to sputter as its Balance of trade and Current account deteriorate further, but the yen remains remarkably resilient with USD/JPY trading near the lows at 78.20 ahead of the North American open.

As we noted earlier the strength of the yen remains driven by low US yields and lingering fears over the prospect of more QE. However, US monetary officials have been circumspect in their policy guidance and we very much doubt that they will pursue any action ahead of the US election in November. A key factor in their decision making process may be tomorrow’s US Retail Sales report. US Retail Sales numbers have been negative for the past three months, raising fears amongst investors that a dampening in consumption could tip the Us back into a recession. We believe that the drop-off in consumer demand was largely the result of a spike in energy prices which have since eased.

The markets are anticipating a rebound of 0.4% in Tuesday’s US Retail Sales report. Should the data meet or beat the forecast, it may go a long way towards alleviating fears of yet another round of QE and could serve a fundamental trigger for a more sustainable rally in USDJPY. However, if the news shocks to the downside with Retail Sales printing a negative result for the fourth month in a row, expectations of more QE will increase markedly irrespective of the political risks that such a move would entail.

Looking ahead to North American session, the eco calendar is empty leaving currency markets to trade on risk flows and any possible headline news from EU. Angela Merkel is wrapping up her vacation, but it appears unlikely that European officials will produce any substantive policy initiatives before September leaving markets to trade in quiet summer ranges for the time being.

Boris Schlossberg
Managing Director

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