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Volatility Abounds as Euro, Pound and Yen Go Their Separate Ways

Last updated 1/26/2010 5:32 AM ET (GMT -5) 2 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• UK GDP misses barely clearing expansion territory at 0.1%
• S&P downgrades Japan triggering a rollercoaster ride in yen
• Nikkei lower and Europe follows on risk aversion flows
• Oil at $74.50/bbl
• Gold gives up $1100/oz. $1090/oz. last

Overnight Eco

• JPY BoJ Rate Decision 0.1% no change
• NZD Credit Card Spending 1.8% vs. 1.5%
• CHF UBS Consumption Indicator 1.20 vs. 1.26
• EUR German Ifo Business Climate 95.8 vs. 95.2
• EUR Current Account 0.1B vs. -3.1B eyed
• GBP Prelim GDP 0.1% vs. 0.4% eyed
• GBP BBA Mortgage Approvals 45.9K vs. 46K
• GBP Index of Services 3m/3m 0.1% vs. 0.4%

Event Risk on Tap

• USD S&P/CS Composite-20 HPI expected at -4.9%
• USD CB Consumer Confidence expected at 53.7
• USD HPI expected at 0.5%
• USD Richmond Manufacturing Index expected at 0

Price Action

• USD/JPY vicious volatility but downside wins as pair drops below 90.00
• AUD/USD pressured by risk flows as it hits 89.50
• GBP/USD weak GDP sends it to 1.6100
• EUR/USD better IFO helps to stabilize the pair at 1.4100

A very busy night of trade in the FX market with the most vicious volatility coming from the USD/JPY pair which went on a wild ride during the Asian and early European session seesawing between 89.50 and 90.30 as it was caught in  the crosscurrents of opposing newsflow. The yen initially strengthened on a report that PBOC increased internal reserve requirements for Chinese banks yet again but  then skyrocketed to 90.30 on an announcement that S&P downgraded Japan’s debt from stable to negative.

However, the USD/JPY rally did not last.   As we noted  earlier, “Presently the forces of risk aversion spurred by fears of a vacuum of leadership in the US and growing evidence of monetary tightening in China are dominating trade flows across all capital markets.” As a result, USD/JPY retraced all of its spike gains falling through the psychologically important 90.00 level once again. The pair may get a boost later in the day if the FOMC statement sends a dovish message regarding  exit strategies, however  the pair is unlikely to gain much traction unless stocks reverse their slide and risk appetite returns to the market.

Meanwhile cable was clipped for more than 100 points in morning London trade after the UK GDP missed its mark barely eking out a positive number of 0.1% versus 0.4% eyed. The UK economy is back in an expansionary mode but only just, indicating that the pace of recovery is sluggish at best.  For all of 2009 the economy contracted -4.8%  the worst on record. The one bright spot in today’s  dataflow was the continued strengthening of the UK housing market with MBA mortgage approvals increasing 45.9K level nearly double from a year. Nevertheless the pace of improvement is glacial, with the Index of Services increasing only 0.1% vs.0.4% forecast.  

We continue to believe that cable can drop below 1.6000, especially if equities  decline further over the next several days. As the most finance dependent economy in G-10, UK is very vulnerable to a double dip recession and is likely to maintain its accommodative monetary policy for all of 2010   and perhaps beyond.

The better than expected IFO readings which increased to 95.8 from 95.1 forecast, helped to keep EUR/USD supported at 1.4100 throughout the night and pushed EUR/GBP to 87.40 as cable weakness kicked in. The better than projected IFO results helped to stabilize the slide in the euro, but the pair remains dangerously close to the 1.4000 level. Still, if EUR/USD can maintain bid over the next few sessions it could carve out a intermediate level of support as fears over Greece begin to dissipate after the country was able to sell 5 Billion euros in bonds. Risk appetite will be key to the pair’s near term direction. If DJIA can hold support at 10K this week, it will provide the foundation for a more sustained rally in the euro.  

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Comments (2)

hsbc

January 26, 2010 at 09:57 AM ET

wat a crazy day

aandrew60

January 26, 2010 at 04:12 PM ET

LADIES & GENTLEMEN:

I just couldn't let this quote go by below, especially since everyone beat up the EUR regarding Greece and their under 6% debt load and especially since the sales seem to be going very well:

1/26/2010: (From THE WALL STREET JOURNAL ASIA)
By John D. McKinnon

Congressional experts pegged the 2010 U.S. budget deficit at $1.35 trillion, a slight improvement from the $1.38 trillion estimate in August, but the overall picture of the government's finances remains bleak, according to the annual report released Tuesday.

The Congressional Budget Office said the government will run an aggregate deficit of almost $6 trillion during the next decade, a level that many economists worry is unsustainable in the long run, and could lead to currency shock, inflation, crippling interest rates or other economic maladies.

The CBO estimate is almost certainly an understatement of the long-term problem. President Barack Obama and many lawmakers in both parties plan to extend many of the Bush-era tax cuts that are set to expire at year end. Officials also want to continue providing relief to taxpayers from the alternative-minimum tax, another break that is costly to the government's finances. Those tax policies -- if enacted later this year -- would add several trillion more to the deficits that aren't counted under the CBO's system.

CBO also is assuming that annual spending rises with inflation, while Congress in recent years -- even before the recent recession -- has been boosting spending at higher rates.

"Under current law, the federal fiscal outlook beyond this year is daunting," CBO Director Doug Elmendorf said on his blog Tuesday morning. "Projected deficits average about $600 billion per year over the 2011-2020 period. . . . Those accumulating deficits will push federal debt held by the public to significantly higher levels.

"At the end of 2009, debt held by the public was $5.8 trillion, or 53% of GDP; by the end of 2020, debt is projected to climb to $15 trillion, or 67% of GDP. With such a large increase in debt, plus an expected increase in interest rates as the economic recovery strengthens, interest payments on the debt are poised to skyrocket." DEBT PROBLEMS WITH GREECE WAS ONLY 6% OR LESS!!! & THEY POUNDED THE EURO...but the USD is the problem!!!

The CBO also predicts that economic growth in the next few years will be muted in the wake of the financial crisis of 2008.

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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.