Euro Steady as Draghi Stresses Integration

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Market Drivers August 29, 2012
Draghi stresses further EZ integration
Swiss KOF rises for seventh month in a row
Nikkei up 0.40% Europe -0.47%
Oil $95.55/bbl
Gold $1668/oz.

Europe and Asia:
CHF KOF Swiss Leading Indicator 1.57 vs. 1.51
EUR German Consumer Price Index n/a

North America:
USD GDP 8:30
USD Personal Consumption 8:30
USD Pending Home Sales 10:00
USD Beige Book 14:00

FX markets were predictably quiet as summer doldrums continued to dominate trade with EURUSD oscillating around the 1.2550 level as traders positioned for possible bond support program from the ECB next week. Mario Draghi gave an interview in Die Zeit in which he reiterated many of the familiar themes noting that a political union can and shall develop in parallel with fiscal, economic and financial union.

He reiterated however, that the ECB is not a political institution and that the EU must make a concerted effort towards creating a more unified fiscal structure. His comments echo those of Angel Merkel who called for a EU convention by the end of this year to address the very issues Mr. Draghi described. The messaging from both monetary and fiscal authorities in EU continues to suggest that they are serious about moving towards further EZ integration and as such continues to provide a level of support for the EUR/USD as credit market fears recede. Today’s Italian T-Bill auction saw yet another decline in yields as the country was able to sell 6 month instruments at 1.585% – the lowest yield since March.

Elsewhere the The Swiss KOF index of leading indicators printed at 1.57 versus 1.50 eyed as it recorded its seventh consecutive monthly increase indicating that the Swiss economy continues to expand under the currency peg regime. It has been nearly a year since the Swiss National Bank intervened in the currency markets setting a floor in the EUR/CHF exchange rate at 1.2000 and during that time the export driven Swiss economy has continued to perform well as exchange rate volatility disappeared.

The KOF institute noted that all three modules including “core GDP”, construction and banking all showed positive developments indicating that the Swiss economy will continue to expand in the foreseeable future. The Swiss economy has been an oasis of calm amidst a sea of EZ turbulence as the country has enjoyed steady albeit unspectacular growth this year along with ultra low unemployment, while the rest of the continent has been mired in a chronic sovereign debt crisis.

The positive economic news today validates the interventionist policies of the SNB but also raises the question of how long can the SNB peg last. The EURCHF has been contained in an ultra tight range of 20 points for more than 5 months, but has shown no impulse to move higher as it remains just a few pips above the key 1.2000 level. The price action suggests that the market remains skeptical about the resolution of the EZ crisis and continues to view the Swiss franc as one the strongest safe havens in the currency market.

In North America today, the focus will turn to housing data, the second revision of GDP and most importantly the Beige Book due at 19:00 GMT. The comments from the Beige Book could prove pivotal to this Friday’s Jackson Hole speech by Fed Chairman Ben Bernanke. The Fed takes the report very seriously and depending on its outcome may either tilt towards or away from QE3. As our colleague Kath Lien noted, “We know that job growth and consumer spending improved in the month of July but what we don’t know is how broad-based the improvement has been and whether it has continued into the month of August.”

Meanwhile the 1.2600 continues to cap any rallies in the EUR/USD, but if the pair can push through the barrier it may trigger a more substantial move higher as some longer term euro bears will have to cover their poorly placed bets.

Boris Schlossberg
Managing Director

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