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Will Euro Make Another Run at 1.50?

Last updated 11/2/2009 5:06 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• CIT files for bankruptcy
• Risk trade bounces but global PMI Manufcaturing data shows pause
• Asia off more than -2% after Friday's Dow decline, Europe marginally higher on open
• OIl at $77/bbl
• Gold a t 1048/oz

Overnight Eco

• AUD AIG Manufacturing Index 51.7 vs. 52.0 last
• AUD MI Inflation Gauge -0.3% vs. 0.0% prior
• AUD HPI 4.2% vs. 3.1%
• JPY Average Cash Earnings -1.6% vs. -2.0% forecast
• AUD Commodity Prices -31.1% vs. 33.9% last
• CHF SVME PMI 54.0 vs. 55.1 prior
• EUR Final Manufacturing PMI 50.7
• GBP Manufacturing PMI 53.7 best in 2 years

Event Risk on Tap

• USD ISM Manufacturing PMI expected at 53.1
• USD Pending Home Sales expected at 0.3%
• USD Construction Spending expected at -0.3%

Price Action

• USD/JPY bounces above 9000 on better risk flows
• AUD/USD runs as high as 9080 ahead of RBA tonight
• GBP/USD better PMI helps keep it above 1.6400
• EUR/USD rallies to 1.4775 on rebound in recovery trade

Risk FX rebounded slightly at the start of week’s trade after a series of manufacturing PMI reports confirmed that economic activity in G-20 remained in expansionary mode. In Australia the AIG Manufacturing Index came in at 51.7 in France the final data showed a rise to 55.6, in Switzerland the SVME PMI registered a 54.0 reading and in Eurozone the manufacturing data posted a 50.7 print.  

However the strongest reading of the night came from  UK  where the PMI data printed at 53.7 versus 50.1 eyed. It was the best performance of UK manufacturing  sector in two years. Furthermore, all of the key  the subcomponents showed healthy improvements as well  with new orders, output and employment gauges all rising to fresh multi year highs The news bodes well for UK Q4 GDP data which should return to positive territory if these trends persist into the end of the year.  Cable perked up after the report rising to 1.6400 against the buck and pushed EUR/GBP towards 9000  once again.

Despite the positive data overnight, sustainability of the recovery trade  remains the key driver to further gains in high beta FX. As we noted earlier, “With recovery trade now priced to perfection  growth in manufacturing sector will need to accelerate in order to maintain the upside momentum in risk assets. With current PMI readings relatively mixed and massive stimulus efforts such as cash-for clunkers programs behind  us, manufacturing growth will need to depend on organic demand in order to sustain the risk trade going forward.

That is turn will be highly depended on the improvement in labor market conditions which is why the longer term direction of FX will be governed by US NFP data due at the end of this week. This week the market will likely turn all of its focus on the employment components of both ISM reports which tend to be relatively accurate predictors of the overall labor demand.”

Today’s key North American event risk will be the ISM Manufacturing survey. Markets  forecast a rise to 53.1 from 52.6 the month earlier, and given the sharp increase  in  Chicago  PMI data on Friday an upside surprise could be in order. However, the employment  subcomponent will likely be as key as the headline number, and if does not  confirm  an improvement  in labor conditions, the rebound in risk FX could quickly run out of steam.

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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.