Euro Rally Runs Out of Steam - A Turn in Risk Assets?

Last updated 10/26/2009 4:20 AM ET (GMT -5) 3 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• PBOC Zhou Hai comments "China should diversify reserves to euro and yen" rattle dollar
• German GFK Consumer sentiment drops for first time in 7 months
• Asian equities up (HK closed) Europe opens bit lower
• OIl holds the $80/bbl handle
• Gold steady at $1056/oz.

Overnight Eco

• AUD PPI cooler at 0.1% vs. 0.3%
• EUR GfK German Consumer Climate 4.0 vs. 4.5 eyed

Event Risk on Tap

Price Action

• USD/JPY remains close to 92.00 but sells off slighltly on Zhou comments
• AUD/USD cant hold the early rally to .9275 as lower PPI weighs
• GBP/USD remains weak post Friday's weak GDP but pops back above 1.6300
• EUR/USD rises to 1.5040 on China reserve story but weak cosumer sentiment caps

As trading kicked off for the week, the dollar was rattled once again by comments from Zhou Hai, a PBOC official who wrote an editorial calling for the Chinese central bank to increase its proportion of reserves of euros and yen. Writing in the central bank backed Financial News, Mr. Hai stated that the U.S. dollar should retain the largest weighting in the reserves, albeit a smaller proportion than at present, while the holdings of euro and yen should be increased to reflect China’s growing trade with the European Union and Japan.

Although the central bank researcher later told Reuters that the statements were "purely my personal view," his comments caused a stir in early Asian trade on fears that China may maintain its massive purchases of US Treasury securities. China has accumulated well over $1 Trillion US dollar reserves and is now one of the largest buyers of US government debt. However, despite the fact that China has already lowered its profile in US fixed income markets, recent US Treasury auctions have shown a very healthy 3 to 1 bid cover ratio suggesting that US domestic demand has become and effective substitute for Chinese capital as a source of funding.

The EUR/USD drifted from its highs of 1.5064 set in mid-morning Asian session to trade at 1.5020 during the European open after the GFK consumer confidence numbers decreased for the first time in 14 months. The GFK data printed at 4.0 versus 4.5 expected on concerns over higher energy costs and rising unemployment. German unemployment data is expected this Thursday with unemployment rolls once again forecast to rise after a surprising drop the month prior.

If German unemployment rates begin to escalate once again, the high EUR/USD exchange rate is certain to become a key point of concern for EZ fiscal authorities. That’s why the recent break above the 1.5000 level has been so subdued with little follow through so far as the currency market continues to fear much more aggressive jawboning from Mr. Junker and company.

With US calendar barren risk flows are likely to dictate currency trade for the rest of the day. US equities sold off on Friday despite a slew of better than expected earnings reports and if the correction continues into today, the 1.5000 level in the EUR/USD is unlikely to hold as risk aversion flows grip the market. Capital markets have all paused after reaching key levels in a variety instruments. With EUR/USD at 1.5000, DJIA near 10,000 and S&P 500 close to 1100 a possible intermediate term top in all risk assets may be in the making as the rally runs out of steam and profit taking begins.

FX Upcoming

Comments (3)

FXDragon

October 26, 2009 at 08:16 AM ET

Why is China buying a lot of us debt? Are treasury yields attractive?

hsbc

October 26, 2009 at 08:53 AM ET

i hope B is right as this rise in eur and gbp is irritating me

GORODN

October 26, 2009 at 02:49 PM ET

eur/usd rally is over. looking at 1.4500-1.4200

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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.