Risk Sentiment Improves Driving, Euro, Aussie Higher

Last updated 7/8/2010 3:29 AM ET (GMT -5) 1 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• RBA maintains rates at 4,5% but remains suprisingly upbeat
• Risk appetite reverses in Asia
• Nikkei up 0.77% Europe sees 1.65% gains
• Oil at $72.21/bbl
• Gold bounces off 1204/oz.

Overnight Eco

• AUD Trade Balance 1.65B vs. 0.53B eyed
• AUD Cash Rate 4.5%
• JPY Leading Indicators 98.7% vs. 99.7%
• NZD NZIER Business Confidence 18 vs. 22
• CHF CPI m/m -0.4% vs .0.1%

Event Risk on Tap

• USD ISM Non-Manufacturing PMI expected at 55.1
• CAD Building Permits m/m expected at -1.3%

Price Action

• USD/JPY recovers to 88.75 as Asian stocks rally
• AUD/USD stages strong recovery to .8850 after an upbeat RBA
• GBP/USD back at 1.5180 with .5200 witihn reach as risk extends
• EUR/USD 1.2550 cleared and 1.2600 next on risk rally

Risk appetite staged a strong turnaround in Asia after Nikkei rebounded and the RBA issued a relatively upbeat assessment of economic conditions Down Under. High beta FX saw a slow and steady rally throughout  the early European trade with EUR/USD rising to take out the 1.2600 figure while cable rallied past 1.5200 before  profit taking kicked in.

On a very quiet calendar night, event risk was dominated by the RBA decision which, as expected, left rates unchanged at 4.5%.  Although Australian monetary officials acknowledged the fact that global growth was slowing, they nevertheless remained positive regarding economic activity in Asia Pacific and offered no hints that the tightening cycle was over. As we stated earlier, monetary officials in Sydney will focus on inflation and labor conditions for their near term guidance and given the strength in the employment subcomponent of yesterday’s AIG services PMI survey chances are good that  the data may surprise to the upside. However, the ultimate decision on rates will likely depend on demand from China.

As we noted, “If Chinese growth begins to cool markedly over the next several months, the RBA is likely to err on the side of caution even if inflationary pressures persist. Australian monetary authorities are fearful of unintentionally tipping the economy into a recession amidst what is still a very fragile and uneven global recovery. The Aussie therefore is unlikely to benefit much from any positive economic data at home until the currency markets are convinced that Chinese growth will remain on track for the rest of the year.”

In Europe meanwhile, currency traders were heartened by news that Swiss inflation was falling last month, stirring fresh speculation that the SNB will resume its efforts at intervention in order to lower the value of the franc. EUR/CHF rose nearly 100 points and helped lift the EUR/USD to 1.2600 in the process. With little data on the calendar this week, the euro is likely to be driven by cross flows  and risk sentiment, although we continue to believe that it is approaching the upper end of its recovery envelope at the 1.2600-1.2800 zone and will likely remain capped at those levels for the near term.

In North America today all eyes will be on the ISM Services report with markets looking for a small decline to 55.1 from 55.4 the month prior. Although risk appetite has been positive in overnight trade, if the ISM data misses its mark the flows could quickly reverse as fresh fears emerge that the US economy will face a significant slowdown in H2 of 2010. USD/JPY has been buoyant throughout the night approaching 88.00 level in steady European trade, but if the ISM data drives US long term rates lower, the pair will be vulnerable to another  retest of the 87.00 figure

FX Upcoming

Comments (1)

Nuaym

July 06, 2010 at 07:47 AM ET

I do agree on the EURCHF but if it breaks the resistance on short term basis of 1.3430 the EURUSD can further come upto 1.2800 level and even bringing the cross of EURJPY to the 113 level.But if not broken EURUSD can come till 1.2160.
For any suggestion's mail me on nuam@cfbglobal.com

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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.