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Risk On! As Euro Holds Above 1.5100 - ECB Ahead

Last updated 12/3/2009 5:39 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• BoA repays TARP loan of $45 Billion
• ECB may signal exit strategy at the meeting
• Nikkei jumps 3%+ on short covering of exporters on weaker yen, Europe up only modestly
• Oil steady at $77.46/bbl, Copper $3.25/lb
• Gold at $1216/oz. after hitting new high at $1225/oz.

Overnight Eco

• AUD AIG Services Index 52.5 cs. 54.8
• JPY Capital Spending -24.8% vs. -15.8% eyed
• AUD Retail Sales bit weaker 0.3% vs. 0.4% forecast
• NZD ANZ Commodity Prices 10.5% vs. 4.7%
• EUR Final Services PMI 53.0 vs. 53.3
• GBP Services PMI 56.6 vs. 57.1 eyed, new business component expands 4th month in a row
• EUR Retail Sales 0.0% vs. 0.2% eyed
• EUR Revised GDP 0.4% as expected
• EUR ECB Rate Decision n/a

Event Risk on Tap

• USD Unemployment Claims expected at 480K
• USD Revised Nonfarm Productivity expected at 8.5%
• USD ISM Non-Manufacturing PMI expected at 51.6

Price Action

• USD/JPY comes close to 88.00 on fresh intervention fears
• AUD/USD above .9300 as risk remains constructive and data within forecasts
• GBP/USD comes off 1.6700 after slightly weaker services PMI
• EUR/USD above 1.5100 ahead of ECB press conference

Risk currencies held steady in Asian and early European trade today helped by a strong short covering rally in the Nikkei and eco data which mostly matched market expectations of continued improvement in economic activity across the globe. EUR/USD remained above 1.5100 ahead of  the ECB rate announcement later today, Aussie rallied to .9300 on the back of decent Retail Sales numbers and cable was the only weakling in the group as it came off the 1.6700 handle after slightly weaker than projected  PMI Services data.  

USD/JPY traded to within a few points of the 88.00 figure on fresh speculation of intervention from BOJ. The decline in the yen created a virtuous cycle in risk flows helping to drive the Nikkei higher by more than 3% as shorts scrambled to cover their positions on exporters. This price action occurred despite very weak eco data which showed that Capex spending shrunk significantly to -24.8% versus -15.8% eyed.

Some analysts have speculated that the BOJ may wait until very thin market conditions during the Christmas – New Years week holidays before taking any action to weaken the currency. In 1988 Japanese monetary policy makers were able to set a floor in the pair by coming in just after New Years when markets were especially illiquid and thus unable to flight the interventionist flow. However, with traders already nervous about  possible action, the markets appear to be doing the policymaker’s work for them. With USD/JPY now comfortable off the 85.00 handle the BOJ may not have to anything unless prices once again begin to slide lower.

In UK meanwhile the PMI services data printed a tad worse than forecast at 56.6 versus 57.0 eyed driving cable off the 1.6700 figure. However, from a broader perspective the news was hardly bearish given the much sharper decline in PMI Manufacturing earlier in the week.  The new business component of PMI Services rose for the fourth straight month in a row and the headline data suggests that conditions remain comfortably in an expansionary mode and should prove supportive for growth going forward.

The problems in the UK economy  have by no means disappeared. Today’s article in the Telegraph suggests that commercial real estate may by the next crisis facing UK banks with fully 29% of the loans to be of questionable value. However, for  cable shorts like us who  have been looking for clear signs of deceleration in the UK economy, this week’s eco data has not confirmed the bearish thesis and the pair may prove to be more resilient over the next few session  if risk appetite holds up.  Nevertheless, 1.7000 remains the cement ceiling for the time being and pound will likely have difficulty breaking that barrier unless risk flows accelerate into the year end.   

In North American trade today the focus will be on both sides of  the Atlantic  as ECB holds it monthly press conference at 13:30 GMT with traders looking for any hints from Mr. Trichet on possible exit strategy from the ultra accommodative monetary policy moves.  Meanwhile In US attention will turn to the jobless claims numbers and the ISM Non Manufacturing data. Of critical concern will be the employment subcomponent of the ISM report which tends to be one of the best forecasters on the NFP number due tomorrow. If the data indicates that US labor conditions are improving the risk trade will likely continue for the rest of the day.

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.