Greenback Tackled From All Sides as Euro Hits Yearly High

Last updated 9/8/2009 5:51 AM ET (GMT -5) 5 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Euro breaks 1.4400 as Gold breaks $1000/oz
• Dollar dumped on UN call for reduction of dollar's dominance in trade
• Equities up mildly in Asia and Europe
• Oil nears $69/bbl mark
• Gold breaks $1000/oz 1008 last

Overnight Eco

• GBP BRC Retail Sales Monitor -0.1% vs 1.8% last
• GBP RICS House Price Balance +2.1% vs. -8.1%
• JPY Bank Lending 1.8% vs. 2.1% prior
• JPY Current Account 1.16T vs. 1.41T forecast
• AUD NAB Business Confidence 18 vs. 10
• JPY Economy Watchers Sentiment 41.7 vs. 43.7 eyed
• CHF Unemployment Rate better ta 4.0% vs. 4.1%
• GBP Manufacturing Production 0.9% vs. 0.3% strongest in 3 years
• GBP Industrial Production 0.5% vs. 0.2%
• EUR German Industrial Production n/a

Event Risk on Tap

• CAD Building Permits expected at -0.4%
• USD Consumer Credit expected at -3.8B

Price Action

• USD/JPY approaches 92.00 on anti-dollar flows
• AUD/USD blows through 8600 new yearly high as data and risk support
• GBP/USD soars to 1.6500 as IP marks best gain in 3 years
• EUR/USD finally takes out 1.4400 with year high next target

No love for the dollar in the currency market tonight as the greenback was gang tackled on all sides, pushed lower by budding risk appetite, better economic data out of Europe  and Australia and a United Nations report that called for a reduction in the dollar’s prominence as an instrument of global trade.  The UN report – the first multinational statement on the issue – argued that dollar’s status as the world’s reserve currency should be subject to reconsideration in light of the major imbalances in global trade that have produced the current financial crisis.

The report by the UN Conference on Trade and Development (UNCTAD) called for a new system of managed exchange rates. “Countries should keep real exchange rates [adjusted for inflation] stable, “it noted. “ Central banks would have to intervene and if not they would have to be told to do so by a multilateral institution such as the International Monetary Fund." While the report in unlikely to have any long lasting impact on the currency market, since it essentially calls for a suspension of free foreign exchange flows and therefore harkens back to the state managed Bretton Woods system which failed so famously in the early 1970’s, its near term effect on sentiment was to precipitate another round of dollar selling as post holiday trading began.

Aided by the rise in gold above the $1000/oz. level and the return of risk appetite as economic data continued to support the recovery trade the greenback was pummeled from all directions all night long.  In Europe, both  EZ and UK data  surprised the upside providing further fuel to the euro and the pound. In Germany the trade balance improved on the back of more than 2% rise in exports primarily to the Middle East while in UK the Industrial and Manufacturing Production reading soared way past expectations as a result of increase in automobile production due to the car scrappage schemes.

The net impact of all these development finally propelled the EUR/USD past the 1.4400 handle and within  a few pips of the 1.4450 yearly highs as option defense barriers fell by the wayside.  There is absolutely no doubt that the recovery bulls control the show for the time being and EUR/USD could make a possible run to test the 1.4500 barrier  before the week’s end. However, unless labor conditions and consumer demand suddenly improve the rally in risk FX will face a much stronger headwind against it as the fall season approaches.

Retail sales indicators such as tonight BRC Retail Sales monitor continue to show contraction as consumers restrain spending. This “new normal” as analysts have started to call it will no doubt translate into very muted demand during the upcoming Christmas season, In the meantime the economic data, juiced up on fiscal stimulus, inventory rebuild and global cash for clunker schemes continues to support the recovery trade, but its adrenaline-like effects are unsustainable unless they can  translate  into  a stabilization of  the labor markets.  In the near term the path of least resistance is to the upside but we continue to believe that chasing the move here could prove perilous for the latecomers. .    

FX Upcoming

Comments (5)

hsbc

September 08, 2009 at 06:21 AM ET

no sight of panda ...

bschlossberg

September 08, 2009 at 08:51 AM ET

watch them circle the 1.4500 figure

Demax

September 08, 2009 at 09:35 AM ET

@hsbc
...eloped with / for a Grizzly on a PandO cruise perchance?

The mental picture could haunt.

@Boris
I just can't get sanguine over the JPN data, looks like the Emperor's new clothes are - well - invisible.
Dollar index NYBOT:DX seems to be courting 77.1, majors having a pullback into the DJ open, Europeans broadly up..

What do you think we might see today?

Sentiment shift concerning the dollar?

jet

September 08, 2009 at 06:28 PM ET

Since when is the UN's opinion influence financial markets??? what a joke

jet

September 08, 2009 at 06:41 PM ET

FYI

Purposes of the United Nations

[edit] Chapter 1, Article 1 of the UN Charter states
The Purposes of the United Nations are[1]

To maintain international peace and security, to take effective collective measures for the prevention and removal of threats to the peace, and for the suppression of acts of aggression or other breaches of the peace, and to bring about by peaceful means, and in conformity with the principles of justice and international law, adjustment or settlement of international disputes or situations which might lead to a breach of the peace;
To develop friendly relations among nations based on respect for the principle of equal rights and self-determination of peoples, and to take other appropriate measures to strengthen universal peace;
To achieve international co-operation in solving international problems of an economic, social, cultural, or humanitarian character, and in promoting and encouraging respect for human rights and for fundamental freedoms for all without distinction as to race, sex, language, or religion; and
To be a center for harmonizing the actions of nations in the attainment of these common ends.

[edit] Chapter 1, Article 2 of the UN Charter states
The Organization and its Members, in pursuit of the Purposes stated in Article 1, shall act in accordance with the following Principles:[1]

The Organization is based on the principle of the sovereign equality of all its Members.
All Members, in order to ensure to all of them the rights and benefits resulting from membership, shall fulfill in good faith the obligations assumed by them in accordance with the present Charter.
All Members shall settle their international disputes by peaceful means in such a manner that international peace and security, and justice, are not endangered.
All Members shall refrain in their international relations from the threat or use of force against the territorial integrity or political independence of any state, or in any other manner inconsistent with the Purposes of the United Nations.
All Members shall give the United Nations every assistance in any action it takes in accordance with the present Charter, and shall refrain from giving assistance to any state against which the United Nations is taking preventive or enforcement action.
The Organization shall ensure that states which are not Members of the United Nations act in accordance with these Principles so far as may be necessary for the maintenance of international peace and security.
Nothing contained in the present Charter shall authorize the United Nations to intervene in matters which are essentially within the domestic jurisdiction of any state or shall require the Members to submit such matters to settlement under the present Charter; but this principle shall not prejudice the application of enforcement measures under Chapter Vll.[1]

I guess we're about to write a new article 3 regarding the currency markets to the UN charter huh ???

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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.