EUR/USD Steady as Deflation Concerns Persist

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Market Drivers for January 7, 2014
German unemployment better than forecast
European flash CPI remains slow 0.8% vs. 0.9%
Nikkei -0.59% Europe .43%
Oil $93/bbl
Gold $1237/oz.

Europe and Asia:
AUD Trade Balance -0.12B vs. -0.30B
EUR German jobless -15K vs. -1K eyed
EUR CPI 0.8% vs. 0.9%

North America:
USD Trade Balance 8:30
USD Economic Optimism 10:00
CAD Ivey PMI 10:00

It been an uneventful night of trade in the currency market with most of the major pairs carving out narrow ranges as traders remained on the sidelines ahead of the key event risk later in the week. The one exception was the Aussie which was noticeably weaker from yesterday as it trickled lower towards the 8900 figure.

The downdraft in the AUD/USD occurred despite better than expected Trade balance data which printed at -0.12B vs. -030B eyed as imports declined by 1% while exports remained flat. The decline in the Aussie was caused by selling from model accounts which were trying to trip the stops at 8900. The Aussie has essentially consolidated in 8800-9000 range for the past several weeks, but remains vulnerable to further selloffs if the economic data from Down Under continues to show signs of a slowdown.

The EUR/USD meanwhile held steady above the 1.3600 level as German unemployment continued to improve. German joblessness declined by another -15K versus -1K eyed indicating that EZ largest economy continues to expand steadily. However, the news on the inflation front remains troubling with EZ CPI in December coming in at 0.8% versus 0.9% eyed while PPI declining to -0.1%.

The deflationary forces in the EZ must be a nagging concern for the region’s monetary policymakers as they clearly signal a lack of final demand. Although conditions in the periphery – especially Spain – have improved recently, Italy and France continue to be a drag on growth and the region clearly needs further stimulus to jump start its economy.

To that end it will be interesting to see if ECB chief Mario Draghi makes note of the growing concerns regarding deflation at the upcoming meeting this Thursday. Some analysts have hinted that the ECB may consider another rate cut to 10 basis points in order to combat the deflationary forces. Certainly any move that would help to lower the value of the euro would be welcome to EZ corporate interests which are facing tough export markets due to single currencies surprising strength.

In North America today the economic calendar provides little excitement with only US Trade data and IBD Eco Optimism survey on the docket. For now it appears that currencies will remain in relatively tight ranges as traders square up ahead of the major risk events at the end of the week.

Boris Schlossberg
Managing Director

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