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Will Euro Start A Short Covering Rally?

Last updated 3/11/2010 4:21 AM ET (GMT -5) 1 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Chinese Retail Sales, IP, inflation all surge prompting fears of tightening
• AUD Employment misses forecast but remains positive
• Nikkei up rest of Asia flat, but Europe called down
• OIl at $81.50/bbl
• Gold drifts towards $1100 at $1106/oz. last

Overnight Eco

• AUD MI Inflation Expectations 3.2% vs. 3.2% eyed
• AUD Employment Change 0.4K vs. 15.2k forecast
• AUD Unemployment Rate at 5.3% as expected
• JPY Final GDP -2.8% vs. -2.9%
• NZD RBNZ Rate Statement no change
• NZD Business NZ Manufacturing Index 53.3 vs. 52.1
• CHF SNB Rate Decision n/a
• EUR French Final Non-Farm Payrolls better at -0.1% vs. -0.4% eyed

Event Risk on Tap

• CAD Trade Balance expected at 0.4B
• CAD NHPI expected at 0.5%
• CAD Capacity Utilization Rate expected at 70.2%
• USD Trade Balance expected at -40.7B
• USD Unemployment Claims expected at 452K

Price Action

• USD/JPY holds well above 90.00 as US growth expecatations remain positive
• AUD/USD climbs back to 91.50 despite weaker than forecast labor data
• GBP/USD 1.5000 remains a cap in quiet trade
• EUR/USD very quiet at 1.3630 as unit consolidates yesterdays short covering gains

A quiet session of consolidation in the currency market tonight with most of the event risk occurring in Asia Pacific as data from China and Australia dominated trade while euro and pound remained in tight ranges. Chinese economic performance continued to beat expectations with Retail Sales, Industrial Production and bank lending  all exceeding their forecasts. However inflation also rose strongly prompting fears of possible tightening by Chinese monetary officials in the coming months.

Chinese Retails Sales increased by a whopping  22.1% versus projections of 18.3% rise, while Industrial Production rose 20.7% against consensus calls of 19.5% gain. Inflation also jumped to 2.7% versus 2.5% expected and was much higher than 1.5% rate a year ago. There is no doubt that the Chinese economy Is booming  and as result of last year’s massive fiscal stimulus package    the country’s growth has been redirected from export  dominated flows to domestic driven demand.

The cost of such a shift however, has been a marked rise in inflation and many analysts are now fearful that the Chinese authorities will begin to clamp down on monetary growth by either raising rates or revaluing the yuan. However we believe that any tightening moves will be gradual at best and will be undertaken only after the Chinese are convinced that US economy is beginning to fully participate in the global recovery. In short, we doubt that the Chinese will make anything more than a cosmetic gesture until US labor markets begin to expand consistently and the US economy can join China as a second driver of global growth.

Meanwhile, in  Australia which is highly dependent on Chinese demand, unemployment data missed expectations with jobs rising only by .4K versus forecasts of 15.2K, but the news camouflaged a hidden strength in the report.  The majority of job gains in Australia were full time positions while losses came mainly from the part time sector. In short Australian labor markets remain robust with unemployment hovering at its lowest levels in a year. Therefore, chances are good for another RBA hike in April bringing rates to 4.25%. In contrast, today’ s RBNZ  statement offered little hope of any monetary tightening before the second half of the year at the earliest  pushing the spread between Aussie and kiwi rates to a record 207 basis points while AUD/NZD targeted the 1.3100 figure in morning London trade.   

In Europe the French labor data helped rally the EUR/USD to 1.3650 at the start of the session as Non Farm payrolls showed a much smaller than expected contraction of -0.1% versus -0.4% eyed. The unit remains well bid after yesterday’s short squeeze rally but its upside potential remains capped by the nagging problems of sovereign debt issuance. Over the next month, Spain, Portugal and Italy will all go back into the debt markets and the fate of the euro is likely to be determined by the degree of investor appetite for such paper. For the time being however, the storm appears to have passed and markets are content to tread water with euro shorts vulnerable to further squeezes on any positive EZ eco news.   

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Comments (1)

alexjbrandt

March 11, 2010 at 05:56 AM ET

I doubt the RBA will raise rates again next month, I think their target rate by end of the year is 4.75%, leaving room for 3 rate hikes over the next 9 months. I wouldn't expect a rate hike again till May at the earliest. Also, the RBA will more then likely pause next month so they can review the effects that their past rate hike has had on the economy. And hopefully by then, the global economy will have recovered more. If they raise rates again next month, I'd be surprised.

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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.