Fear No More – Euro Gets its Mojo Back

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Market Drivers for Feb. 5, 2013
Shirakawa to leave BOJ by March 19 helps push USD/JPY to 93.00
Euro recovers as PMI Services improve
Nikkei -1.90% Europe 0.56%
Oil $96.60/bbl
Gold $1678/oz.

Europe and Asia:
AUD Trade Balance -0.4 vs. -0.8
AUD RBA Cash rate 3.00%
CHF Trade Balance 1.00B vs. 2.74B
EUR Final PMI Services 48.6 vs. 48.3
EUR Retail Sales -0.8% vs. -0.5%
GBP UK PMI Services 51.5 vs. 49.8

North America:
USD ISM Non-Manufacturing 10:00

Risk FX rebounded in early European trade as fears over the economic and political conditions in the EZ abated in the wake of better than expected PMI services data. Meanwhile the announcement of the departure of BOJ chief Masaaki Shirakawa by March 19th sparked a rally in USD/JPY pushing the pair back towards the 93.00 figure after it probed the 92.00 level at teh start of Asian trade.

The EUR/USD rebounded to 1.3540 regaining nearly 90 points after the EZ final PMI services reading came in at 48.6 versus 48.3.The Services sector remains in contractionary territory but has improved for the third month in a row after hitting bottom at 46.00 in November. The news helped to stabilize yields in the periphery as investors once again breathed a sigh of relief that the economy in the EZ continues to improve. Although the region has managed to stabilize its financial sector, the key to any further gains in the EUR/USD will now depend on economic growth and today’s data provided a modicum of proof that economic activity in the 17 member union is beginning to pick up.

The announcement that Mr. Shirakawa is leaving a bit earlier than expected, spurred a fresh round of buying in USD/JPY. Mr. Shirakawa was viewed as a reluctant participant in Prime Minister Abe’s plan to reflate the Japanese economy and sharply weaken the yen. His departure will now pave the way for a more accommodating monetary policy and perhaps fuel the rise in USD/JPY towards the 95.00 level as the markets continue to respond to Mr. Abe’s policy changes.

In Australia the RBA kept the cash rates unchanged as expected at 3.00% but the accompanying statement was viewed as dovish by the market sending Aussie tumbling below the 1.0400 handle as the night progressed. The RBA noted that while easier monetary conditions were having some positive impact, “Present indications are that moderate growth in private consumption spending is occurring, though a return to the very strong growth of some years ago is unlikely.”

The Australian monetary authorities appeared resigned to a year of lackluster growth and although the RBA left rates unchanged it left open the possibility of further rate cuts by stating that,”the Board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the target over time.”

The Aussie therefore remained heavy in European trade setting fresh lows as the session progressed. The pair has support near the 1.0350 level but a break there would open the way for a steeper selloff to 1.0250.

In North America today the key event risk is the ISM Non Manufacturing report which is expected to print at 55.1 versus 56.1 the month prior. If the data beats like yesterday’s ISM manufacturing release the news should help push USD/JPY to fresh yearly highs as US yields will likely respond positively to such news.

Boris Schlossberg
Managing Director

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