Month End Profit Taking Drives Dollar Down

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Market Drivers for August 27 2014

Euro tries to test 3150 but holds

Kiwi up on Fonterra news

Nikkei 0.09% Europe -0.16%

Oil $94/bbl

Gold $1286/oz.

Europe and Asia:

NZD FPI -0.7% vs. 1.4%

EUR Consumer Climate 8.6 vs. 8.9

North America:

No data

Currency markets were relatively steady in quiet late summer trade with very little fresh newsflow on the wires, but dollar came in for a bout of weakness as month end profit taking kicked in.

At the start of Asian session trade the EUR/USD slipped to fresh 2014 lows hitting 1.3151, but the pair found support ahead of the key 1.3150 level as option barrier defenses held the shorts at bay and it managed to bounce to 1.3190 aided by month end flows as shorts booked profits.

The euro is down nearly 300 points in the month of August as interest rate and growth rate differentials have weighed heavily on the pair and today’s price action is a natural rebound for a unit that has been relentlessly sold for most of the summer. As we noted yesterday, the EUR/USD is due for technical relief rally and today’s price action may signal the start of a small bounce, but the longer term trend remains to the downside in the pair as the economic conditions in the region remain grim.

Today’s German Consumer climate reading missed its mark coming in at 8.6 versus 8.9 eyed. Still, the consumer sentiment in Germany remains relatively robust given the geopolitical pressures and if the situation with Russia and Ukraine could stabilize, the lower EUR/USD exchange rate could help business demand rebound in Q4. For now however, the EUR/USD remains under pressure and could test the 1.3000 level sometime in the near term after some corrective bounces.

Elsewhere, the kiwi was the star of the night as annoucement by dairy giant Fonterra that its entering a joint venture to meet demand for infant formula in China was met with approval by the market. The investment of more than 500M suggests that Fonterra may be able to smooth out its delivery problems and also indicates that its stream of income from China – which is a significant contributor to New Zealand economy is likely to remain in place. The kiwi responded well to the news and may target the 8400 level as the day proceeds.

Boris Schlossberg
Managing Director

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