Market Drivers September 18, 2012
Spain auction of T-bills shows improvement
ZEW future expectations jump sharply in wake of ECB actions
Nikkei -0.39% Europe -1.18%
Oil at $96/bbl
Gold at $1760/oz.

Europe and Asia:
AUD Rerserve Bank Board September Minutes
JPY BOJ Monetary Policy Meeting — Meeting Tentative*
EUR German ZEW Survey -18.2 vs. -19.2
GBP CPI 2.5% vs. 2.5%
GBP Retail Price Index 2.9% vs. 3.1%

North America:
USD Current Account Balance 8:30
USD Net Long-term TIC Flows 9:00
USD NAHB Housing Market Index 10:00

A decidedly risk off start to the day in FX today with tension between China and Japan weighing on equity markets in Asia and spilling over into Europe where stocks were lower by more than -1% in morning London trade. As protests in China over Japan’s territorial claims on a string of uninhabited islands continue to escalate investors are becoming concerned that the political dispute between the two Asian powers could translate into a trade war as well with fears that a boycott of Japanese goods by China could weigh heavily on Japan’s growth going forward. China is Japan’s largest trading partner and the current tension is casting a pall over investor sentiment especially if the conflict is allowed to fester for the foreseeable future.

The EURUSD dipped towards the1.3050 level as the day progressed despite decent results from the Spanish auction and an improved reading from the ZEW survey. Spain sold a total of EUR 4.576B of 12 and 18 month T- bills out of a targeted EUR 3.5-4.5B with yields improving to 3.072% (from 3.335% and 2.835% from 3.07% respectively. Meanwhile the ZEW survey showed a better result for the first time in 6 months as future expectations component increased sharply with economic sentiment printing at -.3.8 versus -16.3.

Still the better than expected economic news was offset by geo-political tensions and general atmosphere of profit taking as investors remained wary. Even in Australia the seeming neutral posture of the RBA meeting notes may fall victim to the developing events. As we noted earlier, “The recent escalation of political tensions between China and Japan could cast a cold spell over economic growth in the region forcing the RBA to ease as early as next month. Some analysts have already predicted that the central bank would reduce rates by 50bp over the next two months as it tries to offset the slowing growth in the economy. The Aussie has remained weak in Asian and early European trade slipping to 1.0428 and may test the 1.0400 level later in the day if risk aversion flows accelerate. “

In North America today the calendar is decidedly light with only Current Account and TICs data on tap, neither of which are likely to have much impact on trade. Currencies will likely look to equities for directional cues, but with some of the market participants still out for the Jewish New Year liquidity may be thin. With EURUSD having rallied so far so fast, a correction is due as all of the positive ECB and QE news has been priced in. The pair therefore remains vulnerable to further selloff with shorts looking to trip stops at the key 1.3000 level if risk aversion flows gain momentum as the day progresses.