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Euro Squeezed Higher as Concerns Over Greece Abate

Last updated 3/12/2010 5:41 AM ET (GMT -5) 3 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Chatter of EU rescue package for Greece of 55B helps euro stay bid
• EZ Industrial Production blows past estimates at 1.7% vs. 0.8% eyed
• Asia closes +0.8% Europe up on the open
• OIl at $82.50/bbl
• Gold bounces of $1100/oz.

Overnight Eco

• JPY Revised Industrial Production 2.7% vs. 2.5%
• NZD Retail Sales 0.3% vs. 0.7%
• EUR German WPI 0.1% vs. 0.6%
• EUR Industrial Production 1.7% vs. 0.8%

Event Risk on Tap

• CAD Employment Change expected at 17.5K
• CAD Unemployment Rate expected at 8.3%
• USD Retail Sales expected at -0.1%
• USD Prelim UoM Consumer Sentiment expected at 74.3

Price Action

• USD/JPY holds a tight 90.50-90.70 range but 91.00 could come into view later if US data prints positive
• AUD/USD grinds towards .9200 as risk flows dominate
• GBP/USD short squeeze pushes it through 1.5100
• EUR/USD clears 1.3740 and movs to 1.3790 as short covering kicks in

Euro continued its short covering rally into the weekend, clearing the key 1.3740 level after several European officials lent their support to the creation of a European Monetary Fund that would be able to deal more effectively with future funding crises of its member nations. Both German Finance Minister Wolfgang Schaeuble and Eurogroup chairman Jean-Claude Junker voiced support for such an idea, but Mr. Juncker noted that it was months away from being enacted. “"It will not be an item on the agenda on Monday night because we have to wait for a formal proposal from the (EU) Commission, the Germans, the French and others, to have strong articulation of what this really means," he stated. Nevertheless he  noted, “Yes I do think (an EMF will be formed)”    

Meanwhile an Austrian paper Der Kurier, claimed that German and French officials were working on a 55 Billion euro rescue package for Greece with Germany putting up to 50% of the deal in a form of guarantees rather direct investment into Greek bonds, with the hope that such an action will ultimately cost the Germans nothing in terms of outlays.  The news, spurred a flurry of short covering in the EUR/USD pushing it all the way to 1.3785 in mid morning European trade.  

We have noted over the past several days that the storm over the sovereign debt issue appears to have passed for the time being and with positioning  skewed very heavily against it, the euro was vulnerable to a short squeeze. For now it is difficult to gauge the amplitude of this move, but the pair could make a run for the 1.4000 level if European policy makers continue to make progress on a pan-European solution to this issue and the markets become less apprehensive about fragmentation risk in EU.

On the eco front the calendar was very quiet into the week-end with only the EZ Industrial Production as release of note. The data surprised to the upside  printing at 1.7% versus 0.8% eyed lending further support to the euro rally and providing credence to the  euro longs argument that the region’s export sector will be the engine of growth as 2010 progresses. February’s gain was the best monthly jump in more than 5 years and the second positive reading over the past three months.

In North America today, the focus will turn to the US Retail Sales report with markets anticipating the core number to decline to 0.1% versus 0.6% the month prior. The data may be compromised by the unusually  wintery weather conditions that wreaked havoc on the northeastern part of the country in February, but given  the better than anticipated numbers from scores of retailers, chances of an upside surprise are considerable. If the Retail Sales data does beat forecasts it would provide further confirmation that US domestic demand is beginning to recover and should push USD/JPY towards the  91.00 level as US short term rates begin to tighten.

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Comments (3)

silver

March 12, 2010 at 04:28 PM ET

Hey Boris I have heard that the BOJ is pressuring the political party to change the laws so that they can buy there own treasuries bills. Would that strengthen or weaken the JPY?

MoneyManager

March 12, 2010 at 05:11 PM ET

The BoJ *already* buys GoJ paper, and has been for some time. But you have it slightly wrong, silver. The GoJ is pressuring the BoJ to buy *more*, and the BoJ is actually trying to *resist* that pressure, because the BoJ is concerned that markets will lose confidence in Japan's fiscal responsibility (try not to laugh, eh?) over time.

If your central bank buys all the debt you as a government want to create, there potentially is no end to the amount of money you could create, which could lead to inflation or a crisis of confidence in the currency. Without limits, this would tend to weaken a currency versus other currencies. The market will likely make a decision based on whether it is assumed that the situation is temporary (an emergency, if you will) and might be long-term good for the economy, or fiscal irresponsibility because there is no political will to balance the budget.

MoneyManager

March 12, 2010 at 06:24 PM ET

Silver, just to refine this a bit, the GoJ wants the BoJ to aggressively fight deflation, and to actually set an inflation target, and to use monetary policy aggressively until that target is reached. The BoJ's position is that monetary policy is already accommodative enough, and that deflation is the result of insufficient demand rather than restrictive monetary policy. Their position is that ballooning up the money supply will not necessarily increase demand, and could even lead to an eventual "Greek Drama" in the Western Pacific. Buying more government debt is just one of several possible options the government wants the BoJ to take, but it is probably the last option the BoJ wants to employ.

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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.