Market Drivers September 05, 2012
Risk off in Europe as data remains dour
AU GDP misses as consumption slumps
Nikkei -1.09% Europe -0.47%
Oil $94.90/bbl
Gold $1692/oz.

Europe and Asia:
AUD GDP 0.6% vs. 0.8%
AUD AiG Performance of Service Index 42.4 vs. 46.5
CHF CPI 0.0% vs. 0.1%
EUR German Purchasing Manager Index Services 47.2 vs. 47.5
EUR Eurozone Retail Sales -0.2% vs. -0.2%

North America:
CAD BOC Rate Decision 9:00

Risk currencies drifted lower in morning European trade as economic data from across the globe continued to disappoint suggesting further slowdown in growth in Q3 of this year. In Australia, Q2 GDP printed at 0.6% versus 0.8% eyed as household spending proved weaker than expected and the news dragged Aussie below the 1.0200 level in early European trade. On a year over year basis Australian GDP increased by 3.7% registering its 21st consecutive year of growth. Treasurer Wayne Swan noted that, Australia’s 21 years of growth was “like winning 21 premierships in a row and winning the last four very, very comfortably”.

However currency markets focused on the marked slowdown in household consumption which rose only 0.3% versus 1.0% the quarter prior as consumers curtailed spending. The slowdown in final demand was evident in Monday’s Retail Sales which contracted sharply to -0.8% versus 0.3% expected gain.

Although the latest RBA statement suggests that Australian monetary policymakers are relatively sanguine, tonight’s Australian employment report could be the nail in the coffin for Aussie bulls who believe that the central bank will not move on rates for this year. The market anticipates labor rolls to slow their growth but nevertheless remain positive at 5.1K gain. However, if employment turns negative, the pressure on the RBA to respond will increase significantly as authorities will likely become far more accommodative in order to avoid the risk of economic contraction.

In Europe the EURUSD inched towards the 1.2500 barrier as final EZ PMI Services report clocked in at 47.2 versus 47.5 prior, registering its worst reading in a year as it slipped further below the 50 boom/bust line. Retail Sales in the region came in at -0.2% as expected confirming that consumer demand remains weak and that the EZ is in danger of slipping into a recession as we towards the final quarter of the year. The key question going forward is whether Germany which now faces the very real threat of contracting growth, will become more or less amenable to further European economic integration given the challenging conditions on the ground.

In North America today the eco calendar is barren with exception of Non-Farm productivity data and the BOC statement which is unlikely to provide much of surprise. Yesterday’s win by Parti Quebecois created some mild concern amongst investors regarding the separatist problem in Canada, but PQ’s more radical days are way behind it and the risk of fracture in Canada is far smaller given the current stable economic conditions. The loonie was mildly weaker in overnight trade but more as function of overall weakness in the commdollar complex rather than any specific political risk.

With focus squarely on tomorrow’s ECB meeting, FX trade may me relatively quiet for the rest of the day, but the mood has clearly turned against risk and the bias in high beta FX is to the downside for now with EURUSD looking to test the key 1.2500 level if risk aversion flows continue into North American session.