Euro Rallies on Successful Spanish Auction

Last updated 7/15/2010 5:54 AM ET (GMT -5) 1 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Successful Spanish Auction Fuels Euro Rally
• Chinese data misses forecasts but not as bad as feared
• NIkkei of more than -1.0% Europe lower by -25bp on open
• Oil at $76.80/bbl
• Gold rallies to $1214/oz.

Overnight Eco

• AUD MI Inflation Expectations 3.3% vs.3.4%
• AUD New Motor Vehicle Sales m/m -1.2% vs . -3.9%
• JPY Overnight Call Rate 10bp
• NZD Business NZ Manufacturing Index 56.2 vs. 54.0
• CHF ZEW Economic Expectations 2.2 weakest in 12 months
• GBP Housing Equity Withdrawal q/q -3.2B vs. -3.3B

Event Risk on Tap

• CAD Manufacturing Sales m/m expected at 0.4%
• CAD New Motor Vehicle Sales m/m expected at -5.2%
• USD PPI m/m expected at -0.2%
• USD Core PPI m/m expected at 0.1%
• USD Unemployment Claims expected at 453K
• USD Empire State Manufacturing Index expected at 18.9
• USD Capacity Utilization Rate expected at 74.2%
• USD Industrial Production m/m expected at 0.0%
• USD Philly Fed Manufacturing Index expected at 11.4

Price Action

• USD/JPY 88.00 tested in early Europe but bids prop so far
• AUD/USD tumbles to .8750 on weak Chinese data but recovers in Europe
• GBP/USD fresh swing high at 1.5340 as risk flows supportive
• EUR/USD rallies to 1.2800 as depand for Spanish bonds goes well

Risk FX rallied in midmorning European trade on the back of  a strong Spanish bond auction that allayed fears over the financing of Southern European  sovereign debt. Euro took out the 1.2800 figure while cable finally broke through 1.5300 handle as both currencies set fresh eight week highs. Spain was able to auction off nearly 3 Billion of long term bonds attracting a healthy 2.57 bid to cover ratio versus only 1.79 during the previous auction on April 22nd.  Although demand for Spanish paper was robust, the yield on the 15 year bonds was sharply higher at 5.12% versus 4.43% previously. In a sign of further calm in the credit markets the Spanish/German spread compressed to 194bps in the aftermath of the auction from 205bp before the event.

The news sparked a rally in high beta FX which earlier had come under pressure from weaker than expected Chinese data. Chinese economic releases all missed their mark with GDP printing at 10.3% versus 10.5% eyed, Retail Sales coming in at 18.3% versus 18.8% forecast and Industrial Production sharply lower at 13.7% versus 15.2%.

As we noted earlier, “Risk FX initially rallied in the aftermath of the news on the assumption that the data was not as bad as feared. Traders were also heartened by the lower than expected CPI figures which suggested that Chinese monetary authorities may not have to resort to further tightening measures as the year progresses. However, the early enthusiasm faded as the realization sunk in that Chinese growth is likely to slow in the second half of the year and could contribute to the overall slowdown in global demand.”    

Despite the  rally in euro and cable in overnight trade we believe that further gains will be considerably more challenging as the day progresses.  Today’s North American calendar will have US PPI data which we think will miss to the downside given the decline in import prices. Also on the docket will be reports on Industrial Production, Empire Manufacturing and Philly Fed with market expecting generally lower results. If the data disappoints to the downside, equities are likely to cap their recent seven day streak.  If risk flows turn negative, both euro and sterling are vulnerable to some profit taking and could tumble during North American trade.

One report that could help maintain the risk rally rally today will be the weekly jobless claims numbers due at 12:30 GMT.  The market expects a small improvement to 448K form 454K the week prior. However, if the data surprises to the upside, it may overshadow all other gauges with investors becoming more confident that labor markets are finally showing some signs of pick up. A strong print could negate our bearish view and extend the equity rally, forcing another short squeeze in the euro with the pair targeting 1.2850 as the next objective of the longs.

FX Upcoming

Comments (1)

69monos

July 15, 2010 at 09:46 AM ET

The question is if the EUR rally it’s sustainable. Not many days ago it was said the EUR was heading south (perhaps heading towarsd parity?) and now the market sentiment is that those are "old news" now. Can't really get it, is that just a pause on its way down? It all seems to move bqased on speculation.

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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.