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EUR/USD Hits 1.4900 - Can US Retail Sales Turn The Trend?

Last updated 10/14/2009 5:32 AM ET (GMT -5) 10 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Kohn - no V recovery in sight
• BOJ leave rates unchaged updates assessment
• Nikkei slightly weaker, Europe up on open
• OIl just below $75/bbl
• Gold at $1069/oz last

Overnight Eco

• JPY CGPI -7.9% vs. -7.9%
• AUD Westpac Consumer Sentiment 1.7% vs. 5.2%
• JPY BoJ Rate Decision no change
• JPY Household Confidence 40.5 vs. 41.4 eyed
• GBP Claimant Count Change better at 20.8K vs. 25.1K
• GBP Average Earnings Index 1.6% vs. 1.4%
• GBP Unemployment Rate 7.9% vs. 8.0%
• EUR Industrial Production 0.9% as forecast

Event Risk on Tap

• CAD New Motor Vehicle Sales expected at 0.0%
• USD Retail Sales expected at -2.0%
• USD Import Prices expected at 0.3%
• USD FOMC Meeting Minutes

Price Action

• USD/JPY holds 89.00 support despite dollar weakness
• AUD/USD fresh yearly highs at 91.50 on yield flows
• GBP/USD targets 1.6000 as unemployment improves
• EUR/USD takes out 1.4900 as resevere diversification continues

The dollar was hammered once again in overnight trade as the combination of positive risk flows, reserve diversification talk and dovish comments by Fed Vice Chairman Donald Kohn all conspired to push EUR/USD and AUD/USD to fresh yearly highs  at 1.4900 and 91.50 respectively. Mr. Kohn stated that he did not believe a V shaped recovery was in the cards and that inflation will be subdued for some time.

As we wrote earlier, his comments spurred a fresh round of dollar selling as traders quickly assumed that US rates will remain stationary well into 2010. Recent reports have highlighted the fact that global central bank reserve managers are allocating only approximately 33% of fresh inflows to dollar denominated assets. Most market participants have assumed that reserve managers are shunning  the greenback because of capital depreciation risk and while that is clearly a factor, we believe that their behavior is governed more by interest rate considerations rather than exchange rate fluctuations.

That’s why Mr. Kohn’s  remarks today were especially painful for dollar bulls.  If US rates will remain at 25bp for the foreseeable future, reserve diversification will continue to put selling pressure on the buck. The greenback will therefore be battered twice as hard as specs sell the dollar on carry trade flows while central banks look elsewhere for yield. This vicious cycle could accelerate dollar’s decline if Fed officials maintain the present course of action.

In eco news today, the UK unemployment data was better than forecast with claimant count coming in at -20K versus -25K eyed while the ILO rate printed at 7.9% versus 8.0% forecast.  The better employment numbers suggest that labor market condition in UK are beginning to stabilize and should hopefully provide less of a drag on growth going forward. Sterling popped to 1.6000 on the news. We’ve noted over the past several days that the unit has been grossly oversold and today’s upside surprise along with overall dollar weakness provided the perfect opportunity for a short covering squeeze.  

Although the  price action against the dollar has been relentless this week, the greenback could catch a mild bid if US Retail Sales numbers beat estimates. Although the news is likely to spur another stock market rally and thus be negative for the buck on risk assumption flows we think that the bigger issue of improving US fundamentals could outweigh those factors and provide the dollar with a modicum of support. The greater story in the currency market rests on interest rates and yield. To that end any data that could suggest a quickening of Fed exit strategy from it ultra accommodative policy should help to slow and slightly reverse the bucks’ descent.

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Comments (10)

Always Learning

October 14, 2009 at 06:04 AM ET

Was the sudden spike up in USD pairs at 18:00 GMT yesterday a result of Kohn's comments? The reverse should have happened, but please correct me if I'm wrong. Thank you.

bschlossberg

October 14, 2009 at 06:25 AM ET

Yes it was - I think the market initially expected a more hawkish message and when that did not materialize teh dollar just went on one way trip south

Aziz Rattani

October 14, 2009 at 06:36 AM ET

Why GBP still weak against all major currencies?

jet

October 14, 2009 at 06:49 AM ET

why is GBP weak ??? they may have a worse economy then the US that's why and eruro has been killing the sterling (see euro/sterling trade) plus with all this jpy buyinv, which still makes no sence to me it adds up to weak gbp not to mentioon that is is in a downtrend - still below it's 200 day moving average which is still pointing down - hows that boris?? :-)

bschlossberg

October 14, 2009 at 07:56 AM ET

Ultimately it all has to do with rates. Market believes UK rates will be at 50bp until 2011 -so no bid for sterling. That said I have been bullish on it this week as short covering trade and so far I have been correct

Semaj

October 14, 2009 at 08:55 AM ET

B I didn't read your bullish bias due to short covering for the GBP this week. What article did you post it in? Thanks

bschlossberg

October 14, 2009 at 08:58 AM ET

It was in my yesterday's daily piece and here http://www.fx360.com/commentary/boris/2128/pound-punished-as-pricing-power-nil.aspx

spunky

October 14, 2009 at 09:53 AM ET

Geeze down 20 pips this am in trading, missed 2 of my trades from a total of 3 pips. : { - Wow thought we would get more price action on those better numbers-- right off the bat

engin

October 14, 2009 at 12:37 PM ET

looks like pair's first important target is 1.4987 second 1.5245 but i think the key level is 1.5367

crimson

October 15, 2009 at 11:16 PM ET

How significant can the pound ascent on a short squeeze - as all fundamental/technical data indicate - was such a breakout be inordinately caused by European bank currency institutions supporting such a descent? I was surprised by such a tumultuous rise, which is so volatile to cause little support. Thank you.

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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.