Euro, Pound Decline - Has Risk Rally Run Out Of Gas?

Last updated 6/15/2009 6:43 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Russia FM Kudrin - USD reserve status to remain in place
• Greman credit crunch deepens
• Equities off in Asia and Europe
• Oil below $71/bbl
• Glod 432/oz. last

Overnight Eco

• NZD Manufacturing Sales -0.9% vs. -0.1% last
• CHF PPI -0.3% vs 0.1% eyed
• EUR Employment Change -0.8% cs. -0.4% last

Event Risk on Tap

• CAD Manufacturing Sales expected at 0.0%
• CAD New Motor Vehicle Sales expected at 0.1%
• USD Empire State Manufacturing Index expected at -6.0
• USD TIC Long-Term Purchases expected at 60.1B

Price Action

• USD/JPY ranges within 9800 handle
• AUD/USD breaks 8000 as weaker commodities weigh
• GBP/USD drifts to 1.6300 as weaker equiities pressure
• EUR/USD breaks 1.3900 as profit taking continues

Risk currencies continued to recede from their recent highs, as softer equity and commodity markets strengthened the dollar at the start of the week’s trade.  With 10 year Treasury yields returning to 3.75% after nearly hitting 4.0% earlier in the month, some of the panic regarding the dollar disappeared in the wake of better than expected Treasury auctions last week.    

The weakness in commodity prices which has had a near parabolic run, in the past several months, also helped pressure the risk currencies lower. As we noted earlier, “ Oil has finally run into serious resistance at the $70/bbl level as investors question whether the rally can be sustainable under the current economic environment. With gas prices rising towards the $3/gallon level, at the same time as US unemployment approaches 10%, the likelihood of reduction in consumer demand appears to have increased.”  Not even the political upheaval in Iran managed to roil the oil markets which appear to have reached the limit of the range for the time being.

On the economic front the calendar was extremely light with only EZ employment change on the docket and that number slipped to -0.8% vs. -0.4% the quarter prior. As we’ve stated many times in the past, we continue to believe that the economic situation in the EZ will deteriorate as the summer progresses,  and the unit will  face steady selling pressure as  the enthusiasm for the recovery trade fades. Sentiment was also soured by report from German Chamber of Commerce which noted that. “The liquidity crunch is increasingly threatening the survival of companies, as well as finance for new orders. This is becoming a danger to possible recovery."

In North American session, the Empire Manufacturing survey and the TICs data will be the key reports of the day. Markets are looking for little change in each with Empire forecast at -4.7 while TICS is expected to come in at $55 Billion – well ahead  of the $30 billion Trade deficit.  With recovery trade looking tired, the dollar strength could see some follow through from US traders with 1.3800 level in EUR?USD the next critical level of support. If the pair manages to break to the downside it will have carved out a massive head and shoulders pattern suggesting that euro rally may have topped for the time being.

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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.