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Risk FX Rallies As Eco Data Surprises

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Top Stories

  • IFO blows past estimates 106.2 vs. 101.5
  • UK GDP much stronger 1.1% vs. 0.6%
  • Nikkei follows US up 2.2% Europe mixed
  • Oil at $79/bbl
  • Gold rallies to $1200/oz.

Overnight Eco

  • AUD Import Prices q/q 1.9% vs. 1.0%
  • EUR French Consumer Spending m/m -1.4% vs. 0.3%
  • EUR German Ifo Business Climate 106.2 vs. 101.5
  • EUR Italian Retail Sales m/m 0.3% vs. 0.2%
  • GBP BBA Mortgage Approvals 34.8K vs. 37.0K
  • GBP Index of Services 3m/3m 0.8% vs. 0.7%
  • GBP GDP 1.1% vs. 0.6%

Event Risk on Tap

  • CAD Core CPI m/m expected at 0.1%
  • CAD CPI m/m expected at 0.1%

Price Action

  • USD/JPY ralies above 87.00 as risk flows improve
  • AUD/USD .8950 caps teh rally for now
  • GBP/USD strong GDP data takes it to 1.5400
  • EUR/USD better IFO readings reverse weakness as 1.2950 taken out

Surprisingly strong economic data provided the fuel for a surge in risk currencies on the last trading night of the week, as euro reversed its earlier losses while pound recaptured the 1.5400 level after UK GDP figures beat estimates by a wide margin. The euro had come under strong selling pressure early in European trade after rumors circulated that several Spanish cajas had failed the stress tests due later today. Markets sentiment remained cautious ahead of the release of the report at 16:00GMT that will reveal the financial status of 91 European banks.

However, the sharply higher IFO readings which printed at 106.2 versus 101.5 eyed, caught the shorts by surprise and triggered a massive covering rally that took the pair past 1.2950. The jump in the IFO results was the largest since German re-unification and demonstrates to the market that growth in EZ's biggest economy is improving markedly as the country's critical export sector continues to benefit from the favorable exchange rate differentials.

As we noted earlier, "The EZ bank sector stress tests remain the key focus of the currency market. However, unless they reveal some shocking bad news aside from the expected failure of several Spanish banks along with Germany's Hypo Real Estate, their impact on currency trade may be minimal.

Over the past several days, the upside economic surprises from the Eurozone have to a large extent allayed investor fears regarding the problems in the financial sector by demonstrating that business activity in the 16 member union may be stronger than originally forecast. This upside revision in growth should prove to a be strong support for the banking sector and as a result some of the more extreme concerns regarding EZ fiscal health should begin to evaporate. "

Meanwhile in UK GDP grew at the fastest pace in four years rising 1.1% versus 0.6% forecast.Government spending contributed only 0.2% to the overall number indicating that the recovery in UK economy has now gathered strength and could be more sustainable than we thought. We remain cautious about the second half of the year, given the austerity measures yet to take place and the possibility of more turbulence in global capital markets which could weigh on UK's vital financial sector. However, for the time being the data clearly favors pound bulls and the path of least resistance for the sterling is up. If risk flows prove conducive the pair could take out the 1.5500 handle as the day progresses.

In North American the calendar is empty except for Canadian CPI data and all attention will be focused on the stress tests due at 1600 GMT. If the report does not produce any fresh negative news, the EUR/USD could make another run at 1.3000 figure, as fundamentals in the region have clearly improved providing additional fuel to the relief rally.

FX Upcoming

Currency GMT EST Release Expected Prior
CAD 11:00 7:00 Core CPI m/m 0.1% 0.3%
CAD 11:00 7:00 CPI m/m 0.1% 0.3%

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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