Euro Rallies in a “George Costanza” Market

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Market Drivers
EURUSD Shrugs off weak ZEW, German Court ruling on ESM, high Spanish yields as Grelief dominates trade
Cable follows on risk + theme as more QE post weak CPI seen favorably
Nikkei off -0.75% Europe up 0.30%
Oil at $83/bbl
Gold at $1630/oz.

Asia/Europe Eco Data Overnight:
AUD RBA June Minutes set a neutral to dovish tone
EUR German ZEW Survey (Economic Sentiment) -16.9 vs. 3.8
EUR German ZEW Survey (Current Situation)33 vs 39
GBP Core CPI 4:30 2.8% vs. 3.0%
GBP Retail Price Index 3.1% vs. 3.3%

North America Data on Tap:
USD Housing Starts 8:30
USD Building Permits 8:30
CAD Whole Sales (MoM) 8:30

Risk FX shrugged off a slew of negative economic news as continued relief over Greek elections and expectations of additional monetary stimulus kept risk currencies well bid throughout morning European trade. The EUR/USD dipped below the 1.2600 level twice during the night, but recovered each time to retake the figure trading near session highs ahead of the European open.

A ruling by the German Constitutional court that suggested that the German government of Angela Merkel did not properly inform the Parliament about the ESM program sent the pair tumbling at the start of European trade. However, the news was far less ominous than the headline reading as the court did not make any judgment about the legitimacy of the ESM and simply stated that next time lawmakers must be more informed before the German government commits to any deal.

On the economic front the ZEW data also proved horrid printing at 33 versus 39 eyed with sentiment readings diving to -16 versus 3.8 expected. Again the knee jerk reaction drove the EUR/USD lower by 25 points and again the pair rebounded on the assumption that the sharp decline in sentiment readings may prod the ECB into easing sooner than later.

Some analysts have called the current climate in currencies as a “George Costanza” market where the opposite of expected is occurring and certainly this perverse logic of bad-news-is-good-news theme dominated trade not only in euro but in cable as well. In UK the CPI slipped to -0.1% on a month over month basis dropping to 2.8% y/y versus 3.0% eyed. RPI remained unchanged but slipped to 3.1% versus 3.3% forecast. The drop was caused mainly by sharp declines in oil and food.

This was the lowest UK inflation reading since December of 2009 and a massive 240 basis point drop in headline data in just 8 months indicating that price pressures in the UK economy are clearly easing. The news should provide cover for the BoE to consider more aggressive monetary stimulus measures as threat of nagging inflation appears to be passing.

With no material economic data out of the US, the North American session is likely to be dominated by equity flows and continued speculation regarding tomorrow’s FOMC statement. Markets are primed for some sort of easing cur from the Fed given the deteriorating economic conditions globally and in the US. Indeed, despite the political pressures on him to remain on the sidelines, Dr. Bernanke may choose to act sooner rather than later in order to prop up the weakening recovery. In that case the rally in risk may have more fuel left with EUR/USD targeting the 1.2700 level as it tries to recapture yesterday’s gap open highs.

Boris Schlossberg
Managing Director

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