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Risk Rally Relentless As Cable Joins the Move

Last updated 10/15/2009 5:43 AM ET (GMT -5) 11 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Stevens signals that RBA may hike further
• Cable breaks above 1.6200 on flurry of short covering on crosses
• Asian and European bourses both in green
• OIl holds above $75/bbl
• Gold steady at $1057/oz

Overnight Eco

• NZD Business NZ Manufacturing Index 51.7 vs. 48.8
• NZD CPI much hotter at 1.3% vs. 0.8% eyed
• AUD MI Inflation Expectations 3.5%
• JPY Revised Industrial Production 1.6% vs. 1.8%
• CHF ZEW Economic Expectations 65.0 vs. 58.0
• EUR CPI -0.3% as expected

Event Risk on Tap

• CAD Manufacturing Sales expected at 1.0%
• USD CPI expected at 0.2%
• USD Unemployment Claims expected at 525K
• USD Empire State Manufacturing Index expected at 18.4
• USD Philly Fed Manufacturing Index expected at 12.4

Price Action

• USD/JPY climbs steadily to 90.00 as carry demand pushes it higher
• AUD/USD breaks .9200 making fresh 2009 highs on Stevens speech
• GBP/USD massive demand from EUR/GBP and GBP/JPY pushes it above 1.6200
• EUR/USD comes to within 30 points of 1.5000 but fails to break yet

Another  night of strong gains for high beta FX with Aussie setting a fresh 2009 year high above .9200 and even cable joined the party blasting past 1.6200 barrier as short covering on the crosses fueled the unit’s rise. The news continues to be uber bullish for  commdollar currencies of Asia Pacific as New Zealand CPI printed much hotter than expected stoking speculation that RBNZ will be the next central bank to raise rates while in Australia RBA Governor Glenn Stevens signaled that he will tighten policy further before the end of the year.

In New Zealand the CPI data came in at 1.3% versus 0.8% forecast while the Business Manufacturing index rose above the key 50 boom/bust line for the first time in 16 months printing at 51.7. With inflation starting to percolate and expansion clearly underway, the RBNZ may be forced to consider tightening sooner than it wants. New Zealand’s monetary authorities have been considerably more dovish than their colleagues across the Tasman sea as they fear that a rising currency could damage the country’s key export sector. Therefore, the RBNZ may resist making any moves before the end of the year especially if the kiwi continues to climb higher toward its multi year highs at .8000.

Meanwhile in Australia it appears to be all systems go as Governor Stevens signaled that RBA will continue to tighten policy in to the year end. Speaking in front of an audience in Perth, Stevens said, “If we were prepared to cut rates rapidly, to a very low level, in response to a threat but then were too timid to lessen that stimulus in a timely way when the threat had passed, we would have a bias in our monetary policy framework. Experience here and elsewhere counsels against that approach.”

Although Australian monetary officials remain resolutely hawkish we wonder if they are overplaying their hand. The latest data from Australian  business confidence survey saw its first drop in 5 months suggesting that the pace of economic activity may be decelerating. With Aussie having gained more than 8% in the last two weeks demand for Australian exports could drop markedly and quickly reverse the bullish conditions currently in place.

Meanwhile cable was the other big gainer in overnight trade as sell orders in EUR/GBP and buy orders in GBP/JPY triggered a cascade of stops and pushed sterling above the 1.6200 level.  Sentiment has suddenly changed toward the unit with some analysts forecasting 1.8500 as a three month target.  Although UK economic data has shown some mild upside surprises, the true reason for sterling’s recovery may have to do with the much better capital market environment. With UK economy still inextricably tied to finance, the move above Dow 10,000 has emboldened some cable bulls to imagine that the UK recovery will pick up pace much faster than the market expects.

Finally the risk trade remains entrenched with the dollar seeing very little benefit from positive US data. Today the focus will be on the weekly jobless claims which are a crucial part of the puzzle for the FX market. With currency traders convinced that the Fed will not move on rates until unemployment data turns positive, today’s number could carry some impact if it drifts lower  towards the 500K level indicating that job cutting in US economy is coming to an end. Still, if the equity market rally continues unabated, the greenback will remain offered.  Although the euro has been pressured by EUR/GBP sales all night, if risk flows continue to dominate North American trade, the pair could make another run at the 1.5000 level before the  day’s end.

FX Upcoming

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Comments (11)

Semaj

October 15, 2009 at 07:51 AM ET

B, could this be the week or so that profit taking gives the greenback it's mysterious strength? There are a lot of overextended moves out there. Also, when do the hedge funds & institutions report their profits for the year, sometime in November? Could something like this catch everyone off gaurd if profits are realized in the up comming weeks?

FXDragon

October 15, 2009 at 08:29 AM ET

We will close long euro positions close to end of October. Hedge funds will report during Nov. Some pullbacks will happen, we dont expect a major pullback though. Eurusd possibly hanging down to 1.4735. Lets see...

Semaj

October 15, 2009 at 08:35 AM ET

Thanks for the reply. I see you here @ 360 often, are you a professional trader? ik only ask to combine your repsonses with B & K's.

bschlossberg

October 15, 2009 at 09:31 AM ET

If we retrace I think we can test 1.4500 - they are always sharper than everyone thinks.

FXDragon

October 15, 2009 at 11:15 AM ET

Thanks for the heads up. Analyzing again, 1.4500 would be Sept. and Oct. lows(which we doubt). We assume the pair will start its downfall from around 1.50's, then 1.47's would be pretty logical to take profits. Good luck...

FXDragon

October 15, 2009 at 11:25 AM ET

I am asst. mngr. of a hedge fund's fx operations based in north cyprus turkish republic(its a beautiful island on mediterranean).

Semaj

October 15, 2009 at 12:14 PM ET

Got a spare guest room? Sounds like a nice vacation destination? I am sure I can pick up a few tricks from you, I make a mean Mojito.

FXDragon

October 15, 2009 at 04:30 PM ET

Nice to meet you:) Where are you from? Was mojito that drink you put brown sugar and lime to cup, crush it on mint, add ice bacardi and soda; served with cherry on top? Yumyum. Its 80 F here in winter:) Cocktails are medicine to ease the stress... Have a goood day...

Semaj

October 16, 2009 at 07:32 AM ET

Likewise FXD, I am in NY, we had snow today:( Yeah thats the drink, no cherry.

FXDragon

October 16, 2009 at 10:12 AM ET

Wow! Snow that early? I love snow and boarding. May i ask your profession?

Semaj

October 16, 2009 at 12:09 PM ET

Maybe we'll have the slopes open early this year. I own a hardwood floor business for 25 years. I have been at forex school for roughly 2 years.

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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.