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Risk Returns - But All Eyes on FMOC

Last updated 11/4/2009 6:49 AM ET (GMT -5) 5 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Gold hits a fresh record high at $1094/oz
• UK PMI Services continues to improve
• Asian and European Bourses rise
• Oil back above $80/bbl
• Gold targets $1100/oz.

Overnight Eco

• AUD AIG Services Index 54.8 vs. 49.3
• JPY Monetary Base 4.4% vs. 4.5%
• GBP Nationwide Consumer Confidence 72 as expected
• AUD Building Approvals 2.7% vs. 2.4% eyed
• AUD Retail Sales much weaker at -0.2% vs. 0.5%
• EUR Final Services PMI 52.6 vs. 52.3
• GBP Services PMI 56.9 vs. 55.4
• EUR PPI in line at -0.4%

Event Risk on Tap

• USD Challenger Job Cuts
• USD ADP Non-Farm Employment Change expected at -188K
• USD ISM Non-Manufacturing PMI expected at 51.6
• USD Fed Rate Decision expected at 0.25%

Price Action

• USD/JPY rallies steadily to 91.00 on risk flows
• AUD/USD 7500 improves to 90.75 as gold rise offsets weak Retail data
• GBP/USD better services PMI helps push it through 1.6500
• EUR/USD slow climb to 1.4750 but lags rest of risk FX

Risk currencies rallied throughout the Asian and  European session helped by better than expected data out of UK firmer equity prices and further gains in gold which reached another record high of $1093/oz. Asian and European bourses tacked on gains as global economic data continued to show steady improvement. Yesterday’s US auto sales which came in at 10.2 million annual run rate suggested that consumer demand appears to have stabilized lending further credence to the recovery trade.

The run up in gold may prove to be an additional boost for the Aussie which rallied despite the fact that Retail Sales were much weaker than expected at -0.2% vs. 0.5% forecast. The news initialed felled the Australian dollar as traders became convinced that RBA will stay pat at the December monetary policy meeting, but the pair recovered strongly in late Asian trade to reach new daily highs.

As we noted earlier, “Along with Canada, Australia is one of the top five producers of gold in the industrialized world. However, unlike the loonie which only yields 25 basis points the Aussie carries a 3.5% yield – the highest in the G-10 universe. The AUD/USD& nbsp; has not had any serious correlation with the price of gold for more than several years, trading primarily on risk assumption and risk aversion flows. However, that situation could change rapidly if the rally in gold accelerates attracting further attention to the trade. If gold breaks that key psychological level of $1100/oz, the Aussie could follow suit offering currency traders the dual benefit of high yield and further capital appreciation. “

In UK the Services PMI surprised to the upside  printing at 56.9 versus 55.4 forecast. The report provides further evidence of a disconnect between the horrid GDP report last week and the much better than expected recent economic data. The key question for cable however is whether the BoE will decide to expand it quantitative easing program at the MPC meeting tomorrow. If the BoE decides to forgo any further accommodative measures, cable could see a further rally especially against the euro.   

Meanwhile US data will be the primary focus of the currency market for the rest for the rest of the day with ISM Services and FOMC meeting the two key events on the docket. The ISM data will be important not only for its headline number but also for its employment subcomponent reading which has been an excellent precursor of the overall NFP data due this Friday.  As to the Fed all eyes will be on the phrase, “keeping rates exceptionally low for an extended period”. If the word “extended” is removed we expect USD/JPY to rally further as Fed signals that it may be ready to move to a more neutral monetary stance.

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Comments (5)

FXDragon

November 04, 2009 at 07:16 AM ET

If fed decided to start terminating the unconventional measures, would that be eurusd up or down and also why?

bschlossberg

November 04, 2009 at 08:59 AM ET

That would be euro bearish on the assumption that US rates will begin to normalize

FXDragon

November 04, 2009 at 09:20 AM ET

I would think the impact would not be lasting without assumptions turning into reality. Would you agree?

buphalo

November 04, 2009 at 11:01 AM ET

What effect would a hawkish fed have on aud/usd? Would risk flows increase, sending aussie higher?

jet

November 04, 2009 at 03:41 PM ET

are you people kidding yeah that's it everything sends the dollar lower see whats wrong with this market jeeze

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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.