Has Euro Become a Problem For EZ Growth?

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Market Drivers for April 9 2014

Aussie hits highest mark since November 2013

UK Trade data slightly better, USD/JPY rebounds to 102.00

Nikkei -2.10% Europe 0.42%

Oil $102/bbl

Gold $1309/oz.

Europe and Asia:

AUD Westpac sentiment 0.3% vs. -0.7%

AUD Home Loans 2.3% vs. 1.7%

EUR GE Trade 15.7B vs. 18.0B

GBP UK Trade -9.1B vs. -9.3B

North America:

USD Wholesale inventories 1000 AM

USD FOMC Minutes 200 PM

Dollar slightly got its groove back as the greenback rebounded against euro cable and the yen, but the comm dollars remained unstoppable as both Aussie and kiwi hit multi month highs in Asian and early European trade today.

The rally in antipodeans continued as AUD/USD approached the key 9400 barrier while kiwi managed to break above the 8700 figure before retreating slightly. This was the highest level of trade for Aussie since November of 2013 and the best reading for kiwi since 2011. The move higher was sparked by better than expected AU data as Westpac consumer sentiment improved to 0.3% from -0.7% the period prior and home loans expanded at 2.3% versus 1.7% eyed.

The true reason comm dollar strength however, has to do with yield. With currency market under the impression that US and European rates will remain dormant for the foreseeable future, the antipodeans are the only carry game in town. With AU rates seemingly stable and NZD rates likely to rise, Aussie and kiwi will likely continue to attract capital in a low yield G10 universe.

Meanwhile on the economic front the German trade balance figures came in weaker than expected at 15.7B vs. 18.0B forecast. Exports declined by -1.3% while imports rose 0.4%. The rise in imports was at the highest level since re-unification indicating that consumer demand remains robust, but the dip in exports must be troubling to European policy makers. The rise in the EUR/USD is clearly having a drag on export demand and with EU authorities unwilling to engage in unconventional measures to bring down the value of the exchange rate it could act as a “brake” on growth as in the words of French government spokesman Le Foll.

The euro slipped a bit to hit a low of 1.3778 but has remained relatively well bid and recovered to trade just under the 1.3800 in European mid morning. We continue to believe that this is just a short covering rally and that the pair will come under further selling pressure as the combination of strong exchange rate and tepid domestic demand will weigh on growth in the EZ this quarter. Yet the euro will not really see any significant sell off until the market begins to reallocate capital to the dollar on the assumption that US rate will begin to rise.

To that end today’s FOMC meeting notes could be the key event in North American session as traders seek any clues to US monetary policy. If the FOMC minutes suggest that taper remains on track and most committee members are convinced that growth will pick up, the buck may receive a much needed boost with EUR/USD dropping towards the 1.3750 level and USD/JPY climbing to 102.50 as the day proceeds.

Boris Schlossberg
Managing Director

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