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EUR/USD Rebounds on Short Covering

Last updated 2/8/2010 4:02 AM ET (GMT -5) 3 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• G7 produces no definitive result on Greece providing little support for risk
• Jaoanese data shows slow improvement
• Asia lower as week starts
• OIl at $71.50/bbl
• Gold bounces over $1066/oz.

Overnight Eco

• JPY Bank Lending -1.5% vs. -1.0%
• JPY Current Account 1.10T vs. 1.27T
• JPY M2 Money Stock 2.9% vs. 3.0%
• CHF Unemployment Rate 4.1% vs. 4.3%
• CHF Retail Sales 4.7%
• EUR Sentix Investor Confidence n/a

Event Risk on Tap

• CAD Housing Starts expected at 180K

Price Action

• USD/JPY holds support at 89.20
• AUD/USD 86.50 new consolidation level
• GBP/USD pressure remains as 1.5550 probed to the downside but md morning flows send it back to 1.5600
• EUR/USD rebounds to 1.3700 after finding some support at 1.3625

After a rudderless G7 meeting over the weekend that saw no resolution on the Greek crisis,  risk currencies drifted lower once again at the start of Asian session trade, but rebounded sharply on short covering flows when European markets opened for business. The G7 meeting produced no concrete agreement on the issue of Greece’s fiscal problem. Furthermore congregants proposed a possible 15bp levy on the banking  sector to help pay for the massive fiscal deficits incurred by all the members in 2009. The tax should it ever go into effect would no doubt only aggravate the capital markets putting an additional cost on the finance sector. Nevertheless, despite absence of any positive news high beta FX rallied strongly in early morning London trade.

As we noted earlier,” Although the euro remains pressured by the political and fiscal upheaval in the union, the currency is now grossly oversold after declining for 12 out of the last 15 days. The latest data from CFTC shows that euro positioning has turned strongly negative with shorts growing to 43.7K contracts from 39.5K the period prior. The increase in shorts is now at a record in the series and argues for some sort of technical bounce as late comers get squeezed.”  The push higher was led by Russians, who are typically very adroit traders of inflection points in the FX market and suggests that for now the EUR/USD may have found a temporary bottom at the 1.3600 level.  

With very little economic data on the calendar this week the pair is likely pause for  few days after taking a massive drubbing that saw the EUR/USD decline more than 1000 points over the past month.  Still we believe any bounce  here will simply be  a tactical opportunity to sell as the neither the political nor the economic climate in the region appears to show any signs of improvement for the time being. The  one silver lining for  the EZ economy as a result of the recent euro weakness is the considerable  alleviation of cost to the key export sector. However, with demand in China  likely to cool off and US consumer still moribund, its difficult to determine  if the lower exchange rates will provide any material benefit  to EZ producers.

With nothing on the eco calendar for the rest of the day, risk FX is likely to be driven by equity flows.  Last Friday’s late session rally in the Dow eased most of the intra-day losses  and if index can recapture the 10,000 level today it can provide a further boost to high beta currencies. Having retaken the 1.3700 figure, the market may set its sight on the 1.3755 post NFP high as the next marker to squeeze the late shorts.

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Comments (3)

schultzz.at

February 08, 2010 at 04:48 AM ET

Thanks, Boris. You caught my current sentiment. There is also a U.S. holiday looming next Monday (presidents' day). My personal feeling is that volatility often cools down before a holiday. However, this is a rather subjective view.

Nevertheless, I am shifting to somewhat riskier pairs, preferably long USD/JPY. I think we have seen a capitulation move last Thursday in European/U.S. trading.
Tom Schultz.

bschlossberg

February 08, 2010 at 05:15 AM ET

we may be very choppy this week

Hasti

February 08, 2010 at 02:36 PM ET

Thank You Boris,for your good services
We Translate your team analays and put on our site :
www.AryanForex.com
realy we like you and kathy and all of your team for your best services and...
I hope see you soon.

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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.