IFO Misses But EUR/USD Recovers – Why?

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Market drivers for April 24, 2013
German IFO misses but euro recovers after initial dive
AU CPI shows scope for rate cuts
Europe up 0.52% Nikkei 1.05%
Oil $89.75/bbl
Gold $1424/oz.

Europe and Asia:
AUD CPI 0.4% vs. 0.7%
CHF UBS Consumption Indicator 1.25 vs. 1.24
EUR German IFO – Current Assessment 104.4 vs. 106.4
EUR German IFO – Expectations 107.2 vs. 109.5
GBP BBA Loans for Home Purchase 31.2K vs. 31.2K

North America:
USD Durable Goods 6:30
USD Durable Goods Ex Transportation 6:30

The EUR/USD tumbled in early morning European trade on weaker than expected IFO readings, but the pair quickly recovered its footing and rose above the pre-news levels on bargain hunting and strong demand for euro crosses.

The EUR/USD initially dipped to a low of 1.2953 after IFO missed its mark printing at 104.4 versus 106.4 while the expectations component declined to 107.2 versus 109.5 eyed. This was the second month in a row that business confidence declined as slow demand and unseasonably cool weather weighed on sentiment.

The IFO numbers clearly show that the manufacturing sector in Germany continues to struggle and confirm the slowdown in activity evident in yesterday’s weaker PMI data. There is now a very strong possibility that German GDP will contract in Q1 as the shocks from the periphery begin to spill over into EZ largest economy.

Ironically enough the weak economic data has not had a negative impact on fixed income markets with Italian and Spanish debt performing especially well over the past several days. Much of the strength in the sovereign debt market is coming from speculation that Japanese and perhaps Chinese buyers will reallocate their portfolios as they seek higher yield. This dynamic in capital flows has served as an offset to the dour EZ economic data and has provided some support for the EUR/USD.

Whether this support lasts remains to be seen and the market’s focus will now shift to next week’s ECB meeting with consensus now anticipating a rate cut as the central bank tries to stimulate demand in the region. However, many analysts feel that a mere rate cut will offer only limited impact and argue that the ECB will need to become far more aggressive in its non-conventional measures if it is to jumpstart the moribund economy in the region. Meanwhile the rebounds in EUR/USD remain relatively anemic and the pair could see further lows if the economic data does not improve soon.

In North America today the eco calendar only carries the Durable Goods report with the market anticipating a rebound of 0.5% from last month’s -0.7% decline. USD/JPY has recovered from its vicious fall post yesterday’s Twitter hack fiasco and is now back above the 99.50 level. However, the pair remains capped ahead of the 100.00 mark for yet another day. Still the longer the pair remains above 99.50 the higher the prospect of a stop run through the century level as the longs will no doubt want to run the stops and option barriers still holding at that figure.

Boris Schlossberg
Managing Director

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