Euro Spikes on End of Month Flows Ahead of Bernanke Speech

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Market Drivers August 31, 2012
End of month flows and short squeeze pushes euro to 1.2580 resistance
EZ data weak, Merkel says she supports Weidemann
Nikkei -1.6% Europe up 0.80%
Oil at $94.94/bbl
Golf at $1660/oz.

Europe and Asia:
AUD Private Sector Credit 0.2% vs 0.4%
JPY Jobless Rate 4.3% vs. 4.3%
JPY National Consumer Price Index -0.3% vs. -0.3%
JPY Household Spending 1.7 % vs. 1.2%
JPY Industrial Production -1.2% vs. 1.7%
EUR Lagarde Speaks at Jackson Hole
EUR German Retail Sales -0.9% vs. 0.2%
EUR Unemployment Rate 11.3% vs. 11.3%

North America:
USD U Mich Consumer Confidence 9:55
USD Factory Orders 10:00
CAD GDP 8:30

EUR/USD rose of the final trading day of the month, fueled by a vicious short covering rally, better risk sentiment in equities and some end of the month flows despite the fact that the economic data from the EZ continued to disappoint. Euro rose to a high of 1.2582 by mid morning European trade after plumbing the sub 1.2500 barrier earlier in the session as demand from Middle East caused a furious short covering rally in the pair.

In thin pre-holiday conditions the EUR/USD made a near vertical rise catching many traders by surprise as end of the month flows trumped the dour economic data from the region which showed that German Retails sales declined by -0.9% and the unemployment rate in EZ remained at 11.3%. The sharp decline in German Retail sales which were expected to rise by 0.2% is just the latest data point to suggest that EZ largest economy is starting to feel the impact of the economic slowdown in the 17 member union.

The primary driver for the steep drop in German consumer spending was the rise in fuel prices which diverted income and turned German consumers more cautious in July. With oil prices remaining at their recent highs and business sentiment at 29 month lows, consumer spending in Germany is unlikely to pick up putting further pressure on the growth as the year comes to a close.

Meanwhile ECB officials continued to provide supportive rhetoric for the euro with ECB Coeure stating that the ECB will do everything in its mandate to support the euro and noting that there can be no Europe without the euro. Coeure also reaffirmed the idea that the monetary union must move towards a more integrated budgetary union which has been the common theme of most EZ policy makers as they try to create a stronger structural foundation for the common currency.

In North America today all eyes will be on Ben Bernanke as he gives a speech at the Jackson Hole symposium at 1500 GMT. The FX market will be looking for any clues to possible further action on QE although several other Fed officials have recently stated that QE3 at this point will be unproductive. Few traders expect the Fed Chairman to telegraph his intentions, but the key will be in the tone of his speech. If his assessment of US economic growth is bleak, speculators will likely bid up risk assets on the assumption that some sort of monetary stimulus is coming and the EUR/USD will likely break through the 1.2600 mark which has been the key point of resistance all week long. If on the other hand, Dr. Bernanke remains decidedly neutral then the pair may reverse today’s short covering rally to return to 1.2500 as the month comes to a close.

Boris Schlossberg
Managing Director

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