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Euro Lower, Yen Higher As Risk Aversion Rises

Last updated 1/15/2010 5:28 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Merkel resignation rumors spur selloff in euro
• EZ Trade Balance weaker at 3.9B vs. 5.4B eyed
• Equities mildly higher on strong Intel results
• Oil drops below $80/bbl -$79 last
• Gold at $1135/oz.

Overnight Eco

• CHF PPI 0.1% vs. 0.2%
• EUR CPI 1.1% vs. 1.0%
• EUR Trade Balance weak 3.9B vs. 5.4B
• GBP CB Leading Index n/a

Event Risk on Tap

• CAD New Motor Vehicle Sales expected at 3.2%
• USD CPI expected at 0.2%
• USD Empire State Manufacturing Index expected at 12.3
• USD Capacity Utilization Rate expected at 72.1%
• USD Industrial Production expected at 0.7%
• USD Prelim UoM Consumer Sentiment expected at 73.9

Price Action

• USD/JPY back below 91.00 as risk aversion spikes
• AUD/USD drops below .9300 on euro weakness
• GBP/USD holds up best of all at 1.6300
• EUR/USD tumbles through 1.4400 but recovers a bit after Merkel rumors sweep

The EUR/USD tumbled nearly 140 points in early morning European trade after rumors regarding the possible resignation of German Chancellor Angela Merkel swept through the currency market. The German government immediately denied  the speculation but the pair already weakened by a relatively dovish monetary commentary from ECB chief Jean Claude Trichet    tripped a slew of stops before finally stabilizing at the 1.4400 level.

As we noted earlier, “Although we doubt that the rumors about Ms. Merkel will turn out to be true, currencies are political as well as economic instruments and tonight’s news triggered a typical reaction in the market of ‘sell first ask questions later.’ “. Yesterday’s rather subdued assessment of EZ growth by Mr. Trichet, who even entertained the notion of a possible negative quarter this year, capped the EUR/USD upside at 1.4500 as rate hike expectations for the region were pushed back to H2 of 2010. It now appears that neither US nor EZ monetary policy officials will make any tightening moves until q4 of this year at the earliest, leaving the pair to trade in a low yield environment  for most of this year. That in turn means that we will likely see rangebound  conditions persist unless non-economic factors begin to control trader sentiment.

In economic news, EZ CPI printed a bit hotter at 1.1% versus 1.0% projected hitting a 10 month high on fuel and tobacco costs, but remained well below the 2% ECB limit suggesting that price pressures in the region remain well contained.  The  trade data however was a negative surprise printing only at 3.9B surplus versus projections of 5.4Billion. The news is further confirmation of the fact that demand in export dependent European region may have cooled as 2009 came to a close. The news revived concerns about EZ growth going forward and pushed the EUR/USD below the 1.4400 once again  in late morning European dealing.

Turning to North America, the calendar once again  is relatively light with a slew of second tier release s on the docket including Empire, Industrial Production and CPI data all due before the equity market open. One release that could have an impact however is the U of Michigan consumer sentiment survey due at 14;55 GMT. The market anticipates a rise to 73.8 from 72.5, but the recent disappointments with  the labor and retail sales numbers along with a massive decline in the ABC consumer confidence readings which plunged 11% this week, could lay the groundwork for a downside surprise that could put further pressure on USD/JPY.  The pair declined sharply in the aftermath of yesterday’s weak retail sales numbers and may now try to test the 90.00 support level if the consumer sentiment news turns grim,.

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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.