EUR Remains Under Pressure as Mkt Eyes Spain

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Market Drivers September 27th, 2012
Rajoy to deliver his budget in Madrid
GE unemployment rise for 4th month, UK 2Q GDP bit better but CA widens
Nikkei up 0.48% Europe up 0.11%
Oil $90/bbl
Gold $1758/oz.

Europe and Asia:
NZD NBNZ Activity Outlook
NZD NBNZ Business Confidence 17 vs. 19.5
EUR German Unemployment Change 9K vs. 10K
EUR German Unemployment Rate 6.8% vs. 6.8%
EUR Eurozone Consumer Confidence
GBP GDP -0.4% vs. -0.5%
GDP Current Account -20B vs. -12B

North America:
USD GDP 8:30
USD Personal Consumption 8:30
USD Durable Goods Orders 8:30
USD Initial Jobless Claims 8:30
USD Pending Home Sales 8:30

The EURUSD saw a small short covering rally in Asia with pair rising to 1.2900 level on the back of strong performance in the Shanghai index and speculation of further easing by the PBOC. However, the rally lost its momentum in early European trade concerns over Spain and Greece continued to weigh on investor sentiment as both governments struggled with presenting austerity budgets.

In Spain Prime Minister Rajoy is expected to unveil his budget later today, while in Greece lawmakers announced a tentative deal but did not release details of the cuts to be made. As we noted earlier, Mr. Rajoy is highly reluctant to formally ask for a bailout from EU given the political unrest at home and therefore some analysts believe he will make dramatic cuts in the Spanish budget in order to appease the credit markets. However, the political risks of such a move could be massive and if his policies provoke further revolt amongst the Spanish citizenry the situation is likely to worsen in the foreseeable future.

Credit markets remained on alert with Spain’s benchmark 10 year above 6% for the second day in a row. On the other hand in Italy the 5 year BTP went off at 4.09% versus 4.73% the period prior which was the lowest yield since May of 2011. However the bid to cover ratio slipped to 1.33 indicating that demand is tepid at best. We continue to believe that the divergence between Italy and Spain has lulled the market into a dangerous state of complacency as any stress in Spanish market will inevitably migrate to Italy as well.

On the economic front German labor demand in September remained relatively unchanged as unemployment rolls increased by 9K versus 10K eyed. The seasonally adjusted unemployment rate for September remained at 6.8% matching its rate in August. Job vacancies declined by -4K versus a decline of -5K in August.

Although labor picture in Germany remains relatively robust this is the fourth consecutive monthly increase in unemployment rolls suggesting that the country’s economy is clearly starting to slow and is no longer generating jobs. Germany may be finally falling victim to the broad economic malaise affecting the region as the recessionary conditions in the periphery are starting to make their way to the core of Europe.

In North America the market awaits Durable Goods and GDP data with analysts expecting a rebound in the former to 0.2% from -0.6% period prior. A stronger than expected print could give risk a boost, as traders begin to view US as the engine of growth for global economy, but the data tends to be very volatile and is unlikely to have much impact on trade as events across the pond will likely dominate sentiment. The euro remains in a downward trend and any further risk aversion could push it to 1.2800 as the day proceeds.

Boris Schlossberg
Managing Director

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