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Euro Gets the Leg up on The Week

Last updated 12/15/2008 4:49 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Auto bailout unlikely until Thursday -Reuters
• Nikkei Kospi rally 5% on optimism over bailout, better risk appetite
• Tankan hits 30 year lows but prints within expectations
• European banks have about $4 billion of exposure to Madoff affair
• Calendar quiet today - all eyes on FOMC Tuesday
• Oil quiet at $46/bbl last
• Gold remains bid above $800/oz at $828/oz last

Overnight Eco

• NZD Manufacturing Sales much better 1.3% vs. 0.5% last
• JPY Tankan Manufacturing Index -24 vs. -23 called
• JPY Tankan Non-Manufacturing Index -9 as expected
• GBP Rightmove Home Price Index -2.3% vs. -2.9%
• CHF PPI -1.4%

Event Risk on Tap

• USD Empire State Manufacturing Index expected at -27.0
• USD TIC Long-Term Purchases expected $40B
• USD Capacity Utilization Rate expected at 76.0%
• USD Industrial Production expected at -0.5%

Price Action

• USD/JPY hovers near 91 as risk appetite improves but upside hampered by FOMC rate cut
• AUD/USD runs to 6700 in early Asia on spike in Nikkei and further rise in gold but 6700 ceiling so far
• GBP/USD above 1.5000 in quiet Monday trade with docket empty
• EUR/USD remains strong running to within few pips of 1.3500 as yield continues to attract

EUR/USD got off to a strong start on the first trading day of the week, as optimism among Asian equity investors, whetted risk appetite pushing the pair to within a whisker of 1.3500 level in early European trade. Both Nikkei and Kospi propelled higher rallying more than 5% each on the day, boosted by a variety of factors from the expectations of bailout of US automakers to the more than 7% spike in Baltic Dry Goods index on Friday.

The revival of risk boosted the euro as the currency continues to be the only yield play town amongst the G-3.  As we noted last week, should the Fed lower rates by 75bp on Tuesday, the dollar will have the dubious honor of having the lowest yield in the G-10 universe including that of even the yen. Is it any surprise then that end of the year flow continues to pour into the euro, which with its modest 2.5% yield is playing the role of a one eyed king amongst the multitude of the blind.

 The Madoff affair may have also had some positive impact on the currency, especially if it motivates  European hedge fund investors to repatriate their funds back home. Over the past week we have been skeptical of the sustainability of the EUR/USD rise given the slew of political and economic problems in the region, but last Friday’s revelations of the massive $50 Billion fraud by Mr. Madoff may have tipped the balance of power back to European  assets irrespective of the problems on the continent. The f US financial industry has taken yet another massive hit  in credibility which may be reflected in the further weakening of the dollar today.     

In North American trade today the economic calendar  is relatively quiet with only second tier data such as Empire manufacturing and capacity utilization on the docket. One release that could garner some attention is the TIC flow data due at 14:00 GMT.  The report is always dated, as it records transactions from 2 months back, nevertheless it may shed light on the extent of foreign appetite for US securities – which remains crucial to both the financing of US deficits and the strength of the dollar. The market is looking for $40 Billion print, but if the final number is significantly lower the greenback could come under further pressure as the day unfolds.   

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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.