Euro Rebound Loses Steam, As Debt Concerns Resurface

Last updated 3/9/2010 5:25 AM ET (GMT -5) 3 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Papandreou to meet with Obama later today, Portugal may be downgraded by Fitch
• RICS drops to lowest reading in 6 months, UK TB worse ar -8.0B vs. -6.9B eyed
• Equities marginally lower in both Asia and Europe
• Oil drops to $81/bbl
• Gold quiet at $1121/oz.

Overnight Eco

• AUD ANZ Job Advertisements 19.1% vs. -8.1%
• AUD NAB Business Confidence 19 vs. 15
• JPY Leading Indicators 97.1% vs. 96.9%
• JPY Prelim Machine Tool Orders 217.3% vs. 189.4%
• CHF CPI 0.1% vs. 0.2%
• GBP RICS House Price Balance 17% vs. 34%
• GBP Trade Balance worse ar -8.0B vs. -6.9B eyed

Event Risk on Tap

• USD IBD/TIPP Economic Optimism expected at 48.9

Price Action

• USD/JPY drops below 90.00 as risk contracts
• AUD/USD holds .9100 on relative strength as eco data supportive
• GBP/USD pushed below 1.5000 as eco data weak and Moody's issues warning on banks
• EUR/USD below 1.3600 as jitters over Southern Europe persist

Risk FX drifted lower in Asian and early European trade as worries over Southern European sovereign debt continued to dog  the EUR/USD while cable suffered from a slew of negative data that pushed the unit back below the 1.5000 level.  The Aussie was the only risk currency to hold its ground as data Down Under once again surprised to the upside, but even the G-20 high yield leader could not hold the .9100 figure as risk aversion flows sent it to session lows by mid morning London trade.  

In UK the eco data was depressingly weak with RICS hitting a six month low at 17%  vs. 34% as the housing sector appears to be turning lower once again, triggering  fears of a double dip recession. In addition the UK Trade Balance which many analysts has expected would contract to -6.9B given the weakness of the pound actually expanded to -8.0B as exports plunged -6.9% to 19.5 Billion – the sharpest drop in more than four years. To add insult to injury, the latest YouGov poll indicates that the race between Labour and Tories remains neck in neck creating the possibility of a hung Parliament.

Cable slipped below 1.5000 as the preponderance of negative data weighed on the unit.  It could remain under pressure for the rest of the day if risk aversion flows dominate  trade. Sentiment against the pair continues to build and if the eco news produces yet  more negative surprises later in the week, the market will begin to price in the possibility of a double dip sending sterling to retest its yearly lows at 1.4800.

In  sharp contrast to UK, Australian economy continues to operate on all engines with tonight’s ANZ Job Advertisements soaring  to 19.1% from a decline of -8.1% on January. The dramatic jump in ANZ data was the biggest gain in more than 2 years and bodes well for the Australian employment report due Thursday at 00:30 GMT.  

Meanwhile in Europe the  EUR/USD continues to struggle with the sovereign debt issues of its Southern member nations  with the market concerned about the possible downgrade of Portugal by Fitch ratings. Today,  the Greek Prime Minister George Papandreou  is scheduled  to meet with President Obama where he is expected to ask for regulatory support to curb speculative activity in the CDS market. Mr. Papandreou is particularly frustrated with the fact that the country’s austerity measures have not resulted in lower financing costs for Greek government debt. He stated that, "We will have a very hard time implementing our reform program if the gains from our austerity measures are swallowed up by prohibitive interest rates."

This is a critical point for Greek fiscal officials as they try to refinance a further 20 Billion in debt in April and May and could reignite the sovereign debt crisis if European authorities are unable to come up with a pan-European solution to mitigate the high cost of borrowing for Greece. The uncertainty surrounding this issue could continue to pressure the EUR/USD lower unless European official act quickly and in concert.

Finally turning to North America, the calendar remains nearly barren for the second  day in a row with only the IBD/TIPP economic optimism survey on the docket. The market is looking for a significant bounce to 48.9 from 46.8 the month prior and if the data meets or beats the forecast it could provide a modicum of support for  the risk trade. However, the bigger focus is likely to be on Washington today as traders keep a wary eye on any possible regulatory proposals from President Obama.  

FX Upcoming

Comments (3)

jamierm79

March 09, 2010 at 06:01 AM ET

I know this is of the subject, but does anybody know what the state of play is with investing in the Iraqi dinar. Do you think that it will show up on the Forex soon with a more competative figure like maybe 1-1 with the US dollar. Thoughts please.

schultzz.at

March 09, 2010 at 07:16 AM ET

Greek bond yields are not higher than they were in the late 1990s before the nation joined the euro area. In fact, the convergence of european yields was 'irrational' as there is no common bond market, no common fiscal policy and big differences in competitiveness among member countries.

I think the only reason why Greece could auction its bonds so smoothly is an abundance of liquidity and an extremely high level of risk tolerance among investors. Merrill Lynch's index of CCC-rated bonds is up 4.90% ytD, 140% over 52 weeks.
Tom Schultz.

bschlossberg

March 09, 2010 at 07:22 AM ET

Tom - its all relative in low growth/low inflation environment 6% is very onerous

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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.