Risk FX Remains Bid in a Data Vacuum

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Market Drivers for July 27th, 2012
Risk remains bid for 2nd day in a row as Aussie makes fresh weekly high
No major data in Europe, US GDP on tap
Nikkei up 1.46% Europe up 0.25%
Oil at $90/bbl
Gold at $1622/oz.

Europe and Asia:
JPY National CPI -0.2% vs. 0.0%
JPY Retail Trade 0.2% vs. 1.2%
CHF KOF Swiss Leading Indicator 1.43 vs. 1.24

North America:
USD GDP 8:30
USD Personal Consumption 8:30
USD U. Mich Confidence 9:55

Risk FX remained bid into the final trading session of the week with EUR/USD holding near the 1.2300 level in early European trade while Aussie climbed to a fresh weekly high of 1.0440 as equities rose for the second day in a row. The economic calendar in Europe was barren with many market players away for summer vacation, but Mario Draghi’s words of support for the euro continued to reverberate through the markets providing a bullish tone for high beta fx.

Mr. Draghi noted yesterday that the ECB would do whatever was necessary to protect the euro zone from collapse, raising expectations it will move quickly to lower borrowing costs in southern European economies like Spain. Spain today released its unemployment figures which were a tad better than expected but nevertheless showed joblessness rising to an all-time high of 24.6%. Those figures must take with a grain of salt as many Spaniards work off the books and the labor conditions are not nearly as depressive as the headline numbers would indicate. Still the economic situation in EZ fourth’s largest economy is clearly bleak and further exacerbated by usurious debt services costs that the sovereign must pay in the credit markets.

Therefore, Mr. Draghi’s comment coming as ahead of the ECB meeting next week, have sparked speculation that the central bank may resume its Securities Market Program to help support bonds and lower yields in the secondary market. In general, it appears that EZ fiscal and monetary authorities are finally beginning to appreciate the dire economic circumstances in the region and are starting to coordinate a more active policy response to the stress caused by the sovereign debt crisis.

Still for now, the market has heard only rhetoric and many participants remain skeptical about the efficacy of any policy initiative form the EU. This is perhaps the most positive aspect of the latest rally. With the overwhelming majority of sentiment still aligned against the euro, the single currency may have more upside to go as the shorts get squeezed on only whiff of positive news.

In North America today, the focus will be on US GDP data, with markets anticipating further decline in growth to 1.5% form 1.9% the period prior. There is good reason to believe that growth slowed in Q2 as retail sales contracted for three months in a row and employment gains were tepid at best. However, if the GDP data provides even a small upside surprise it could help fuel the risk rally further with traders viewing the Q2 numbers as the low point in annual growth. If on the other hand the data misses and shows a steeper decline in growth, the risk rally could come to an abrupt end with markets once again becoming concerned about a synchronized global slowdown.

Boris Schlossberg
Managing Director

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