Risk Returns as Euro Targets 1.5100

Last updated 12/1/2009 5:11 AM ET (GMT -5) 0 Comments - Add your comment

Forex Trading involves high risks, with the potential for substantial losses and is not suitable for all persons. Past performance is not necessarily indicative of future results.

Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• RBA hikes to 3.75% levaes future unclear
• BOJ introduces fresh QE measurs of 10T yen in emergency meeting
• Nikkei and European bourses up 2%+ in string risk rally
• Oil at $77.48/bbl
• Gold fresh highs at $1193/oz. -$1200 in view

Overnight Eco

• AUD AIG Manufacturing Index 51.2 vs. 51.7
• AUD Building Approvals -0.6% vs. 2.0%
• AUD RBA Rate Decision 3.75% vs. 3.5%
• EUR Unemployment Rate 8.1% vs.8.2% eyed
• CHF GDP 0.3%
• EUR German Retail Sales 0.5% vs. 0.6%
• GBP Nationwide HPI 2.7% vs. 2.4%
• EUR German Unemployment Change -7K vs. 10K forecast
• EUR Final Manufacturing PMI 51.2 vs. 51
• GBP Manufacturing PMI 51.8 vs. 54 eyed

Event Risk on Tap

• USD ISM Manufacturing PMI expected at 54.8
• USD Pending Home Sales expected at -0.4%
• USD Construction Spending expected at -0.4%
• USD Total Vehicle Sales expected at 10.5M

Price Action

• USD/JPY gyrates over 87.00 after BOJ announces new QE measures trying ot weaken yen
• AUD/USD recovers after early selloff to trade above .9200
• GBP/USD lifted above 1.6500 on surging equity markets
• EUR/USD better eco data an risk flow help put it well above 1.5050

With global capital markets putting the Dubai World story behind them risk assets rebounded strongly tonight helped by supportive eco data from the EZ as equity markets rallied more than 2% helping to lift high beta FX to session highs by mid morning European trade. In Australia the RBA produced an unprecedented hat trick by hiking rates for the third month in a row to take the benchmark rate to 3.75% - the highest in the G-20 universe.

The Aussie, initially sold off on the news in a classic buy the rumor sell the news dynamic, as profit taking kicked in, but as the night progressed fresh bids materialized and the unit was lifted above the .9200 figure on strong risk flows. As we noted earlier,” if the fundamentals of the Australian economy continue to show steady expansion, the unit should resume its rally against the buck given the massive interest rate differentials between the two currencies. The Aussie is the only liquid high yielder amongst the G-20 currencies and as such it should continue to attract carry trade flows if the environment for risk remains supportive.”

The news from Europe continued to impress with German unemployment once again contracting by -7K against expectations of 10K rise while the final PMI Manufacturing numbers ticked up to 51.2 versus 51.0 eyed. The unemployment rate also improved to 8.1% from 8.2% projected. Overall the tone of the European data should prove supportive to the euro and will likely lead to cautiously hawkish comments from ECB chief Jean Claude Trichet at this Thursday’s press conference where me may elaborate further on plans to remove some of the QE measures undertaken during the credit crisis.

In contrast to the ECB the BOJ held an emergency meeting today to expand its QE measures by 10 Trillion yen. The policy action had less to do with expanding credit to the system and more to do with weakening the yen which had become dangerously strong for Japanese exporters as it approached the 85.00 handle. USD/JPY initially rallied to 87.60 on the assumption that the BOJ would also lower the benchmark rate to 0.0% from the current 10bp but when that announcement failed to materialize the pair dropped through 87.00 level but quickly stabilized at those levels. For the time being Japanese policymakers achieved their objective by slowing down the pace of appreciation of the yen, but if US eco data proves disappointing later in the day risk aversion flows could resume pushing the pair towards the 85.00 handle once again.

Eco disappointment was the story of the day in UK where the manufacturing PMI data missed projections printing at 51.8 versus 54.0 expected. This was the third miss in four months indicating a stall in the manufacturing sector at the 50 boom/bust line. Despite its impressive recovery on risk trade flows we continue to be skeptical of the pound rally and feel that amongst the majors it is the most vulnerable to a sharp correction in the near future. If the rest of the PMI reports this week show a similar decline in activity the market will once again begin to price in the possibility of additional QE measures by the BoE. The pound therefore could come under heavy selling pressure especially on the crosses against the euro and the Aussie which should continue to gain ground on relative strength.

In North American session today the ISM Manufacturing report will take center stage with market anticipating a slight decline to 54.8 from 55.7 the period prior. Given the weak dollar and the upward surprise in the Chicago PMI data yesterday chances are good that the ISM data should beat to the upside which could provide further gains for risk FX. As we noted yesterday the key trade in the market this week is between the recovery bulls betting on further improvement in economic activity and the bears betting on resumption of risk aversion flows. For the time being the bulls are in control and high beta FX edges higher.

FX Upcoming

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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.