No Growth in EZ, But Euro Rebounds on Short Covering

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Market Drivers for August 14 2014

German GDP misses turns negative -0.2% in Q2


Nikkei 0.66% Europe -0.56%

Oil $97/bbl

Gold $1317/oz.

Europe and Asia:

NZD Retail Sales 1.2% vs. 1.1%

EUR GE GDP -0.2% vs. 0.0%


North America:

USD Weekly Jobless 08:30

The EZ GDP missed its mark and German growth turned negative in Q2 of this year, but EUR/USD was essentially unchanged in morning London dealing as markets anticipated weak results.

The German flash GDP reading for Q2 came in at -0.2% versus -0.1% eyed as foreign trade and investment, especially construction were responsible for the contraction. Foreign trade is likely to become a much bigger problem for Germany in Q3 of this year as heightened tensions with Russia and a series of diplomatic sanctions are almost certain to cool off activity as the year proceeds.

The yield on the 10 year German Bund dropped below the 1% mark for the first time ever, but the currency markets however were unperturbed by the news as EUR/USD held its ground at the 1.3350 level and then staged a quick short covering rally to 1.3390. There was absolutely no fundamental reason for the move, but with the pair so grossly oversold it was due for a bounce as the shorts have been unable to break the 1.3330 support for the past 5 days. Still the euro remains in a sell the rally mode and today’s weak GDP data only underscores the economic challenges facing the region in the second half of this year.

Elsewhere, the comm dollars were much better bid with kiwi staging a rally through the 8500 figure. Today’s New Zealand Retail Sales showed a slight beat to the upside coming in at 1.2% versus 1.1% eyed, but what really propelled the unit higher was the chase for yield. As the European fixed income assets continue to see their yields compress in the wake lackluster growth, both the Aussie and the Kiwi offer the only viable alternative in the G-20 universe for investors desperate for any rate advantage on their sovereign debt return.

In North America today the calendar is relatively subdued with only the weekly jobless numbers on the docket. Another sub 300K print could be a boon for the buck as it would once again highlight the outperformance of the US economy and may send EUR/USD back to the 1.3350 region while pushing USD/JPY back above 102,50 as the day proceeds.

Boris Schlossberg
Managing Director

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