Euro and Pound Retrace as Risk Rally Pauses

Last updated 7/16/2009 5:20 AM ET (GMT -5) 2 Comments

Forex Trading involves high risks, with the potential for substantial losses and is not suitable for all persons. Past performance is not necessarily indicative of future results.

Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Kiwi outlook downgraded by Fitch
• China GDP at 7.9% vs. 7.7% eyed
• CIT talks fail may file for bankruptcy today
• Equities mildly higher in Asia but no follow through in Europe
• OIl at $61.75 last
• Gold at $935/oz.

Overnight Eco

• NZD CPI hotter at 0.6% vs. 0.5%
• JPY Tertiary Industry Activity weak at -0.1% vs. 0.3%
• CHF ZEW Economic Expectations 0.0%

Event Risk on Tap

• USD Unemployment Claims expected at 530K
• USD TIC Long-Term Purchases
• USD Philly Fed Manufacturing Index expected at -5.0

Price Action

• USD/JPY dips below 9400 in profit taking post China GDP
• AUD/USD drops below 8000 as Rio Tinto conflcit escalates
• GBP/USD trades below 1.6400 as rsik assets pressured
• EUR/USD dips ot 1.4050 but finds suport

It was a very choppy night of trade in the currency markets with a slightly downward bias for risky assets. The G-10 eco calendar was barren of any key data but news of failed talks between CIT and US government which would likely force a bankruptcy by the lender later today along with an unexpected downgrade of New Zealand by Fitch ratings dampened risk appetite and halted the rally in high beta FX.

The kiwi which had rallied above 6500 in yesterday’s North American trade, lost more than a penny after Fitch rating downgraded the outlook for the island economy but maintained is AA+ rating on the debt. The agency notes that high current account deficits could cause financing problems dampening growth in the kiwi economy going forward. However as we noted earlier, “Ultimately the kiwi remains a proxy on Chinese growth and if today’s positive trends in Chinese GDP, Industrial Production and Retail Sales continue into the second half of the year, any dip in the currency will turn out to be a buying opportunity on a longer term basis.”

Meanwhile news out of China was generally quite positive with GDP rising 7.9% vs. 7.7% forecast, Industrial Production skyrocketing at 10.7% vs. 9.7% eyed and Retail Sales rising at 15% rate. The data suggests that China’s stimulus plan continues to generate internal demand with Fixed Asset Investment climbing a whopping 33.6% on a year over year basis. However, the currency markets sold off on the news, partly because the whisper number on GDP was expected to exceed 8% and partly on skepticism by some market participants about the sustainability of Chinese growth in the absence of pick up in global demand.

In North American session today the economic focus turns to weekly jobless claims and the Philly Fed numbers due at 14:00 GMT, but sentiment toward risk is likely to be guided by earnings releases from JP Morgan. Marriot and Nokia. After yesterday very strong rally the  equity market appears to have a bit of hangover and if equities retrace some of their gains, the downward pressure on high beta FX is likely to remain in place for the rest of the day.

FX Upcoming

Comments (2)

fuji

July 16, 2009 at 08:14 AM ET

Hi, Boris, I'm new to FX, read your article everyday, like it very much, hear you guy talk a lot about the comodity currencies and high beta currencies, just want to clear that are they the same. Thank You.

bschlossberg

July 16, 2009 at 08:16 AM ET

They are. High beta refers to currencies like pound aussie, loonie kiwi and euro which tenf to have higher volatility

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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.