Cable Collapses as Risk Gets Clobbered

Last updated 8/17/2009 5:02 AM ET (GMT -5) 0 Comments - Add your comment

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

• Shangahai drops another 5%
• Japanese GDP misses forecasts
• Asian and European equities sharply lower at start of week
• Oil at $66/bbl
• Gold at $944/oz.

Overnight Eco

• GBP Rightmove HPI -2.2% 0.6% last
• JPY Prelim GDP 0.9% vs. 1.1% eyed
• CHF Retail Sales 0.9% vs, 0.8.% forecast
• EUR Trade Balance 4.6B vs. 1.4B eyed largest in 2 years

Event Risk on Tap

• USD Empire State Manufacturing Index expected at 2.6
• USD TIC Long-Term Purchases expected at 17.8B
• USD NAHB Housing Market Index expected at 18

Price Action

• USD/JPY trades down 9450 on risk aversion but bounces to 94.75 in early Europe
• AUD/USD trade below 8200 as risk appetite cools
• GBP/USD hammered lower to 1.6350 on worse than expected Rughtmove
• EUR/USD

Risk aversion dominated trade on the first day of the week, as Shanghai index slid another 5% lower and Japanese GDP figures missed to the downside triggering  fears that the recovery trade is topping out.  The Shanghai stock market had one of its worst performances of the year dropping -176 points  below the key 3000 mark after putting in a double top last week. Concerns over the lack of consumer demand in the West (NYT reported that back to school sales in US  will decline for first time since records were kept) and diminishing liquidity at home continue to dog Chinese  equities as investors bail out in droves putting pressure on risk currencies.

Cable was the weakest major of the night dropping nearly 200 points to 1.6320 after Rightmove housing survey showed that prices decreased -2.2% versus 0.6% gain the period prior. This was the sharpest drop in 8 months and cast doubts on the assumption that prices in the UK housing market were beginning to rebound. As we’ve been noting continuously, sterling for that matter the UK economy are both inextricably tied to the performance of global capital markets and if equities begin to slide into the end of the month the pair is very likely to test the 1.600 0 level to the downside as demand for risk cools considerably..   

In Japan today the GDP data printed positive for the first time in five quarters but missed market expectations of 1.1% rise, increasing only 0.9%. Furthermore as we wrote earlier, “most analysts were skeptical whether this rebound could be sustained into the second half of the year given the fact that exports, especially to China began to slow in June while household spending remained moribund.” USD/JPY continues to trade below 9450 and if risk aversion flows accelerate in North America it could tumble below 9400 on further unwind of the risk trade.  For the time being yen’s appreciation is unlikely to have any material negative impact on Japanese exporters who have adjusted their hedges to 9000, but if the pair drops below that key barrier Japanese GDP could once again turn negative as both margins and export demand will be sharply reduced.

In North America today, the market will get a glimpse of the Empire Manufacturing survey and the TOCS data. Empire is expected to turn positive to 3.1 from -0.6 the month prior and could offer a small boost to risk FX on the open if it meets or beats forecasts. TICS is also expected to print better at 17.7B versus -19.8B  the period prior.  Overall however, the directional  tone in the FX market is likely to be set by the action in equities. Friday’ s disappointing U of M data cast a pall over rebound trade and the weak back to school results are providing no help to the bulls. After the massive rally of the past several months, risky assets appear primed for a correction that may well start this week.

FX Upcoming

Loading...

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.