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Headwinds for German Growth Spook Markets

Risk appetite has continued to fade after yesterday’s marginally lower close on Wall Street, with another round of disappointing economic data out of Germany weighing on global equity performance and enticing investors to add exposure to safe haven asset classes.   The closely watched central bank policy meetings offered little in the way of surprises during the overnight session, with both the Bank of Japan and Reserve Bank of Australia keeping both policy and language in-line with previous statements.

While the BoJ, as expected, didn’t offer any tweaks to their asset purchase program, Governor Kuroda did address the hotly debated topic of a weaker Yen, opining that the recent Yen depreciation reflects diverging monetary policies between Japan and the US, and that it has “not been a problem” for the Japanese economy.   Mitigating the bearish Yen rhetoric from the BoJ Governor, Prime Minister Abe reiterated that in his view the falling Yen has been hurting small companies and consumers, along with the chairman of the ruling Liberal Democratic Party noting the government should consider a monetary policy exit strategy.   So while the BoJ chief remains on message in terms of utilizing monetary policy to achieve Japan’s inflation goals, it appears as if some politicians are becoming less comfortable with another bout of Yen weakness.   Despite the fact the greenback is recouping some of yesterday’s losses against the majority of the majors; USDJPY is still lower on the session, with the pair grinding in the mid-108s.

Keeping with the theme of central bank’s that didn’t veer off message, the Reserve Bank of Australia elected to keep interest rates stable at 2.5% and echoed the prudent course of monetary policy action was one of stable interest rates.   There were some minor tweaks addressing what the central bank considers as an overvalued domestic currency and the hindrance it plays on achieving a balanced recovery, with Governor Stevens removing the language that the Aussie is above its fundamental value, though kept the usual comment about the Aussie remaining high by historical standards, despite the recent drop.   AUDUSD initially moved lower after the statement was released, but an absence of any new rhetoric in an effort to jawbone the Aussie lower helped the pair find a bid tone and is back challenging the 0.88 handle.

Focusing our attention on Europe, further softness in the Germany economy has spooked equity investors and is warning of strong headwinds to growth late in the third quarter.   While we highlighted yesterday the drop in industrial orders may be foreshadowing a similar slide in industrial output, the 4.0% m/o/m fall has the bid side of the Euro order book light, with EURUSD easing back towards the 1.26 handle.   Though we have argued valuations of the USD are looking stretched at these levels, a consolidative bounce in EURUSD could be short-lived if German data continues to disappoint, as the concern of a dramatic slowdown in the zone’s economic powerhouse would have the ECB revising their monetary policy trajectory and likely putting greater thought into an outright QE-style program.

Heading into the North American open, equity futures are sagging, with commodities under pressure as the big dollar is able to stem yesterday’s losses.   Front-month WTI has been able to find support above the $90/barrel mark, while Gold is also trading with a $1,200/ounce handle, as some of yesterday’s rally is culled.   In terms of economic releases on the docket, the calendar is fairly light, though Canadian Building Permits will be released at 08:30EST, which are expected to correct all of July’s 11.8% gain.   Additionally, the JOLTS Job Opening report for August will be released and is forecast to show continued improvement in the labour market with openings expanding to 4.7M.  The perpetuation of improvement in ancillary labour market indicators will likely keep the greenback supported, though a reading south of expectations would give Yellen and Dudley more dovish ammo to keep monetary policy conditions accommodative.

Further reading:

5 Most Predictable Currency Pairs- Q4 2014

Gold Futures bounce back from 1185 support

Scott Smith

Scott Smith

Scott Smith is a Senior Corporate Foreign Exchange Trader with Cambridge Mercantile Group and has a diverse background in the foreign exchange industry, with previous experience in both credit and trading related functions. Scott holds a Bachelor of Commerce degree from the University of Victoria, has completed all three levels of the Chartered Financial Analyst designation, and is currently working towards the Derivative Market Specialist certification offered through the Canadian Securities Institute. Cambridge Mercantile Group.