Euro Holds Ground Despite Weak IFO

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Market Movers for August 27th, 2012
Chinese profit slump, CNY fixing lower hurts AUD and NZD
IFO misses but euro steady on hopes of ECB deal
Nikkei up 0.16% Europe -0.14%
Oil at$97/bbl
Gold at $1672/oz.

Europe and Asia:
CNY Industrial Profits -2.7% vs. -2.2%
EUR German IFO 102.3 vs. 102.7

North America:

It’s been a quiet start what promises to be one of the quietest weeks of the year with London out on bank holiday and most of Europe still away on vacation. The euro sold off below the 1.2500 figure in late Asian session trade on concerns that the friction between ECB and the Bundesbank regarding the proposed program to control the credit spreads in in the region could delay any action on that front.

The pair however rebounded after the release of the IFO data despite the fact that the sentiment survey missed its mark and showed deterioration for the fourth month in a row. IFO printed at 102.3 down from the downwardly revised 103.2 in July with both the current situation and the future expectations components declining as well. The picture drawn by the IFO data shows that Eurozone’s largest and most robust economy is not immune from the slowdown in the region, and is likely to face flat to negative growth in the second half of this year.

The news however had a positive impact on the euro with the pair rising to 1.2525 in the aftermath of the release as the market believed that the weak IFP results may pressure the Germans to become more acquiescent to the proposed ECB plan. The news tonight clearly shows that Germany cannot escape unharmed if the rest of the EZ falls into a deep recession and therefore e policymakers may now temper their insistence on austerity and instead will pursue more simulative policies in order to revive growth in the 16 member union.

Elsewhere, the Aussie continued to soften dropping below the 1.0400 barrier after Chinese industrial profits showed a decline of -2.7% and the CNY fixing saw the yuan weaken to 6.3392 from 6.305 on Friday. The Asia-Pacific commdolars remain under pressure as evidence of Chinese economic slowdown begins to mount. EUR/AUd is once again above the 1.2050 level and the pair could target the 1.2100 figure as the day proceeds if North American session sees further capital outflows from AUD/USD.

In North America today, the eco calendar is barren but the market will hear from two Fed officials Evans and Pinalto. Evans, who is perhaps the most prominent dove on the FOMC is a non-voting member this year, but PInalto is and his comments may create some volatility later in the day. For the time being the EUR/USD is contained in the 1.2500-1.2600 region and may remain there for the rest of the day unless the market receives further clarity on the prospect of ECB bond buying program which given the summer doldrums does not appear to be very likely.

Boris Schlossberg
Managing Director

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