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Dollar Rebounds Off the Lows as Risk Expectations Ease

Last updated 10/22/2009 5:17 AM ET (GMT -5) 8 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Chinese data misses high estimates but shows strong growth
• UK Retail Sales miss monthly expecations but rise 2.7% y/y
• Asian and European bourses both lower
• Oil remains above $80/bbl
• Gold steady at $1058/oz.

Overnight Eco

• JPY Trade Balance 0.6T vs. .38 expected
• JPY All Industries Activity 0.9% higher than 0.4% eyed
• CHF Trade Balance 1.92B vs. 1.58B forecast
• EUR Current Account -1.3B vs. 1.9B
• GBP Retail Sales 0.0% vs. 0.5% forecast

Event Risk on Tap

• CAD Retail Sales expected at 0.2%
• USD Unemployment Claims expected at 516K
• USD CB Leading Index expected at 0.9%
• USD HPI expected at 0.3%

Price Action

• USD/JPY rises to 91.50 as Japanse investors chase yield
• AUD/USD profit taking takes it .9200 after miss of Chinese data
• GBP/USD hammered to 1.6500 on disappointing UK Retail Sales data
• EUR/USD 1.5000 can't hold as CA misses and risk appetite declines

Dollar gained some strength in overnight trade after a series of data misses from China and high beta FX currencies dampened risk appetite and sent equities lower in both Asia and Europe.  Chinese GDP numbers printed  in line with consensus at 8.9% but missed the whisper number of 9.1% precipitating a profit taking sell off in Aussie and kiwi.

We warned yesterday that with the recovery trade priced to perfection the risk of disappointment was high and today’s trade was a classic buy the rumor sell the news dynamic. However, as we noted earlier, “Overall, today’s data out of China remains supportive of the recovery trade as the fourth largest economy in the world continues to record impressive growth. The news today may temper the interest rate expectations for Australia and New Zealand as it suggests no serious overheating in the Chinese economy and therefore little need for rapid tightening of monetary policy in the two Anglo Saxon economies of  Asia Pacific. Still the overall trend of growth continues unimpeded and that bodes well for further appreciation of the Aussie and kiwi.”

Meanwhile in UK the Retail Sales number printed at 0.0% versus expectations of 0.5% increase and the news hammered the pound to the 1.6500 level. The data was surprising given the robust reading in the BRC index, but the weakness came from clothing and textiles and footwear which declined  -0.5% indicating that the UK consumer remains reluctant to spend in the current economic  environment which remains challenging despite the rebound in activity.

Cable was further weakened by comments from BoE member Paul Tucker who told  the Scotsman newspaper that expanding the BoE's 175 billion pound asset purchase scheme was an option for policymakers if deemed necessary, once again reviving fears that the program may increase. Cable has rallied strongly over the past week largely on the assumption that MPC members have reached the limit of quantitative easing. However today’s comments have once again put that issue in doubt although we believe that the BOE will not make any further moves unless conditions deteriorate markedly.

In Europe the Current Account data turned negative once again indicating that the higher exchange rates are beginning to weigh on the balance of payments in the region. That trend is likely to exacerbate if the EUR/USD remains at these levels.   We believe the high value of the currency is starting to impact economic activity in export sensitive Eurozone and tomorrow’s IFO report may reflect that concern by printing lower than the current expectations which would put further downside pressure on the unit.

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Comments (8)

FXDragon

October 22, 2009 at 05:52 AM ET

We kinda believe EZ enjoys the high xchange rate to get energy cheaper. So i guess whisperers in China arent always right afterall:)

hsbc

October 22, 2009 at 06:07 AM ET

8.9 vs 9.1 ... still around 9% right? i mean wat did u really expect? 9.1% on the spot?

hsbc

October 22, 2009 at 06:08 AM ET

honestly which country in the world has 8.9% gdp, negative cpi and 14% industrial production? the figures are excellent in my opinion

bschlossberg

October 22, 2009 at 08:04 AM ET

As I said, given the data, there is no reason to think that recovery trade will not continue. China still operating on all cylinders

::EX::

October 22, 2009 at 07:42 PM ET

What is your take on EUR/USD

the pair found support at 1.4945 and is above 1.5020 looking to set a new high.

I think there is a room for 1.5100 before a major reversal

::EX::

October 22, 2009 at 08:29 PM ET

EUR/USD moves above 1.5050.
Next target as mentioned 1.5100

Got the answer and i got the daily target.

My trade was long 1.5037 T/P 1.5060 S/L 1.5015

FXDragon

October 23, 2009 at 01:59 AM ET

It doesnt look like it hit 1.5060 on my platform. What was your leverage on that trade?

morrow

October 22, 2009 at 08:55 PM ET

hello i am doing a research on the fx market, in particular looking at official intervention and the reason behind it , one of the reason i came across in the literature blamed technical forecasting tools for causing major abruption in the exchange rate, becasue they are inprecise and move exchange rates away from true economic fundaments , i know this a trader longue but it would be really helpfully if anyone could recommend an article or jornal soure that talks about this issue in depth. thanks

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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.