Will Slowdown in Germany Force ECB to Act?

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Market Drivers for August 28 2014

German unemployment rises for 3 month out of 4 but M3 expands

AUD PCE rises 1.1% vs. 0.6%

Nikkei -.49% Europe -0.58%

Oil $93/bbl

Gold $1292/oz.

Europe and Asia:

AUD PCE 1.1% vs. -0.6%

EUR GE Unemployment 2K vs. -6K

North America:


USD Weekly Jobless Claims 8:30 AM

USD Pending Homes 10 AM

It’s been another lackluster night of trade in the currency market as most of the majors remained within striking distance of yesterday’s NY close with little volume or news flow to move prices.

The euro continued its recovery off muti-month lows climbing above the 1.3200 level in early European trade despite a mixed bag of releases from the region. In Germany the unemployment data showed a rise of 1K jobless on seasonally adjusted basis against expectations of -5K decline.

This was the third month out of the past four that German unemployment increased indicating that labor demand and growth in EZ largest economy are clearly slowing. Although the rise in joblessness was minor and the unemployment rate remained at 6.7% the downward trend suggests a cooling of economic activity in Germany that could have negative bearing on the whole region.

On a positive note EZ M3 – the broadest measure of money supply grew at 1.8% versus 1.5% – a mild improvement that perhaps offers the first hint of credit growth in the region. The ECB is very focused on expanding credit in the EZ as a way to jumpstart the moribund economy, but the market remains sceptical as to whether Mr. Draghi and company will act at the next meeting in September.

Ironically enough, a clearly dovish stance by Mr. Draghi that would aggressively expand credit in the region through some form of QE may actually be taken as a positive for the euro on the assumption that it could revive growth going into the end of the year. For now the pair remains supported by some end of the month profit taking and could try to make another run at the 1.3250 level as the day proceeds.

Elsewhere the comm dollars continued their rally today with AUD/USD breaching 9350 level while NZD/CAD recovered the 8400 handle. The strength was driven in part by better than expected Private Capital Expenditure numbers which rose 1.1% versus -0.6% eyed although plant and machinery capex declined by -0.9% versus +2.8% the period prior. The data from Down Under continues to support the idea of a steady state economy and therefore the Aussie continues to attract buyers especially as yields in Europe compress below 1%.

In North America the calendar brings weekly jobless claims and the 2nd revision of GDP. Neither data point is likely to be market moving but if it surprises to the upside it could provide some support to USD/JPY which is struggling once again at the 104.00 level. The pair may not be able to do much until next week’s NFPs, but a failure to hold 104.00 would create a triple top and could lead to a steeper correction in the pair.

Boris Schlossberg
Managing Director

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