German Unemployment Spikes, But Euro Refuses to Buckle

Market Drivers May 28, 2014

German unemployment rises for 1st time this year

EU Money Supply expansion less than forecast

Nikkei .24% Europe -.23%

Oil $104/bbl

Gold $1266/oz.

Europe and Asia:

NZD ANZ Business Confidence 53.5 vs. 64.8

CHF GDP 0.5% vs. 0.6%

EUR GE Unemployment 24K vs. -14K

EUR Money Supply 0.8% vs. 1.2%

EUR Consumer confidence 102.7

North America:
No Data today

German unemployment increased at the biggest pace in 5 years putting mild downward pressure on the euro today in generally quiet mid morning European trade. The EUR/USd drifted towards the 1.3600 barrier but continued to hold above the figure after German data revealed a gain of 24K in new unemployed versus forecasts of -15K decline.

This was the first time since November of last year that German unemployment rolls increased and was the worst loss of jobs since 2009. The unemployment rate, however, remained at 6.7%. The news on the labor front suggests that even the mighty German economy is starting to experience some headwinds as geopolitical tensions in the region as well as stubbornly high exchange rate are starting to take their toll.

In other European economic news French consumer spending declined by -0.3% versus 0.5% eyed and the EZ M3 money supply expanded at an anemic 0.8% rate versus 1.2% eyed. The data indicates that the region remains mired in a deflationary morass leaving the ECB with little choice but to ease monetary policy at its next meeting in June.

The euro however, refuses to buckle. Given the surprisingly negative data out of Germany today, one would have thought that the shorts could push the pair for a test of 1.3600 but instead it has held above that level throughout the European session trade. The key reason for euro's strength is the weakness in US yields. The 10 year benchmark has slipped below the 2.5% level once again tempering any possible dollar rally.

This standstill in FX is likely to continue as long as US rates drift lower. The weakness in European data is offset by the contraction in US yields leaving EUR/USD in a tig of war between the long and the shorts. With no US data on the docket today, the currency market is likely to take its cues from bonds. If US rates can stage even a modicum of a rally the 1.3600 figure is likely to fall as the day progresses.