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Top Stories

• WSJ - Germany is Expecting Major Budget Shortfall
• IFO - beats mildly 85.9 vs, 85
• GBP Rightmove falls for first time in 5 months
• Equities rally in Asia but off in Europe
• Oil drops below $70/bbl
• Gold $933/oz.

Overnight Eco

• NZD Visitor Arrivals 0.2% vs. 2.5% previous
• GBP Rightmove -0.4% vs. 2.4% last
• JPY Tertiary Index 2.2% vs. 2.3% forecast
• AUD New Motor Vehicle Sales 5.4%
• NZD Credit Card Spending -2.4% vs -1.6%
• EUR German IFO 85.9 vs. 85

Event Risk on Tap

• CAD Foreign Security Purchases 5.54B

Price Action

• USD/JPY tight range of 9630-9585 as some carry gets sold
• AUD/USD drops below 8000 on concerns that RBA may cut further later in the year
• GBP/USD tests bids at 1.6400 as Rightmove falls for first time in five months
• EUR/USD

The euro was on the back foot throughout Asian and European trade today despite better than expected results from the IFO survey as traders focused on a Wall Street Journal report that suggested German budget deficits could widen significantly in 2010. The pair was under pressure from the start of trade falling through the 1.3900 handle after WSJ noted that Germany could see as much as 100 billion euro shortfall next year. Given the fact that euro balance sheet support is contingent almost solely on Germany’s finances tonight’s news was not received well by the market.

On the economic front the IFO report beat expectations, hitting 85.9 versus 85 eyed, as the gauge of business sentiment rose for the third month in a row. However, as we noted earlier, “At best the IFO data indicates that business climate in Germany – EZ largest and most important economy – has stabilized but has yet to show any meaningful signs of a rebound. The region remains mired in the worst recession of the post war era, and the recent rally in the EUR/USD which has raised exchange rates for  the critical export sector is likely to only exacerbate the pressure on profit margins.” In short, although the IFO  news was a better than expected  upside surprise it was not meaningful enough to push the euro higher and the pair may continue to struggle as the day wears on.

In UK the Rightmove house survey declined for the first time in 5 months to -0.4% from 2.4% last, suggesting that the recovery in the country’s housing market may be running out of steam. After testing support at 1.6400 cable shrugged off the news and rallied to take out 1.6500 in late morning London trade boosted primarily by EUR/GBP flows. However we remain highly skeptical of the pound rally as the pair hovers near its 2009 highs. More than any other major,  the pound is highly dependent on equity market flows and should global stock markets begin to correct as the summer develops, cable could be vulnerable to a sell off.

In North America today the calendar is barren save for the Canadian Foreign Security Purchases data and FX flows will likely be driven by equity market action. The bias for the moment continues to favor the dollar despite US budget financing issues, as the picture in the EZ looks no better. For the past two weeks we have been arguing that the recovery trade is beginning to look tired and although tonight’s IFO data is positive for euro bulls, tomorrow’s PMI readings will be far more important in  determining whether economic activity in the region is beginning to improve. For the time being the buck remains bid.

FX Upcoming

Currency	GMT	EST	Release	Expected	Prior
CAD	12:30	8:30	Foreign Security Purchases	5.54B	6.85B

About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.