Euro Slides on Risk Aversion

Last updated 7/10/2009 5:47 AM ET (GMT -5) 4 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Chinese exports slump for 8th straight month
• UK PPI mixed with output still declining -0.2%
• Equities slightly lower in Asia and Europe
• Oil drops through $60/bbl $59.84 last
• Gold at $910/oz.

Overnight Eco

• EUR French Industrial Production 2.6% vs. -.01%
• GBP Producer Price Input 1.5% vs. 0.8%
• GBP Producer Price Output -0.2% vs. 0.3% eyed

Event Risk on Tap

• CAD Employment Change expected at -30.3K
• CAD Unemployment Rate expected at 8.7%
• CAD NHPI
• CAD Trade Balance expected at -0.5B
• USD Trade Balance expected at -30.0B
• USD Prelim UoM Consumer Sentiment expected at 71.1

Price Action

• USD/JPY drops to 92.50 on ral money EUR/JPY sales
• AUD/USD risk aversion pressures to 7750
• GBP/USD unwinds to 16250 after mixed PPI data
• EUR/USD back below 1.3900 as risk aversion weighs

The euro tumbled from its North American highs on the last night of trade for the week, driven by lower by  large sell orders from Asian accounts in the EUR/JPY cross and a mildly negative tone in equities in both Asia and Europe. The pair tested bids at 1.3900 despite relatively positive economic data from France and Italy.

French Industrial Production improved markedly in May rising 2.6%  against expectations of -0.1% drop  as the car scraping plan by the government helped fuel a rebound in the automobile sector. However as we noted earlier, “While the rebound in manufacturing is impressive and clearly signals the end of the inventory destocking for the time being, the question going forward is whether it is sustainable. The car-scarping plan may have simply served as a short term stimulus for industrial demand and the true picture of the state of EZ manufacturing will not emerge for another few months.”

Meanwhile in UK the PPI data printed mixed with input  component rising a much sharper 1.5% vs. 0.8% eyed while the output numbers continued to decline to -0.2% versus 0.3% expected. The output drop was the first negative reading since December 2008 and suggest that pricing power remains non-existent. With crude prices receding off their highs, next month numbers are likely to post a decline as well. Cable has rallied since yesterday BoE’s announcement on quantitative easing, but we think this is knee jerk reaction as the fundamental data out of the UK is actually getting worse and the unit faces more downside risk as the summer progresses.

In another piece of evidence that the recovery trade is getting long in the tooth  - China’s exports declined and 8th straight month in June dropping more than 21% from a year ago. The news puts into doubt analysts’ projections of 8%+ growth for the Chinese economy which has continued to boom on domestic spending and massive lending by the banks. However, internal demand by itself is unlikely to generate sustained growth for China and as global economic demand continues to wane, China’s position as the engine of growth  will begin to weaken.

In North America today, the economic calendar carries Canadian employment data and US trade balance numbers. With Canadian unemployment expected to rise, the loonie could see further weakness especially if   crude continues its slide below $60/bbl. On the US side the  Trade Balance numbers are expected to essentially match last month’s readings at -$30 Billion and are unlikely to be market moving. Of more interest to both the currency and equity markets will be the U of M consumer confidence data due at 14:00 GMT. Given the decline in the ABC weekly numbers and the steady drop in President Obama’s approval rating the chance of a downward surprise are high which could spur yet another round of risk aversion into the weekend close.

FX Upcoming

Comments (4)

Gary

July 10, 2009 at 08:15 AM ET

Hi Boris -
Not sure how, but I have not caught the Obama approval ratings going down thing. Can you direct me to a reference or report on that? thanks

bschlossberg

July 10, 2009 at 08:18 AM ET

http://www.rasmussenreports.com/public_content/politics/obama_administration/obama_approval_index_history

twbear

July 13, 2009 at 07:23 PM ET

Boris,

When the EUR started there the dificulty of joining the EUR was difficult. Now with you article on debt it appears there has been 180 degree switch. Fot instacle on of the best that you list is France. It is more than twice the rate that my finance professor would have failed me.

Ted Wood

bschlossberg

July 14, 2009 at 02:47 AM ET

Yes easier entry has diluted the financial strength of its members

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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.