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Euro Unwinds Rally As Volatility Massive, Liquidity Scarce

Last updated 12/19/2008 5:17 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

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Overnight Eco

• JPY All Industries Activity -0.5% better than-0.8% forecast
• GBP GfK Consumer Confidence -33 vs. -39 forecast
• NZD Credit Card Spending -0.7%
• JPY BoJ Rate Decision 10bp
• EUR German PPI -1.5% vs. -1.0% called
• GBP Revised Business Investment

Event Risk on Tap

• CAD CPI market looks at -0.7%

Price Action

• USD/JPY runs into offers at upper 8900's as equities wobble on the close
• AUD/USD fares better than most holding 6850 for now
• GBP/USD holds around 1.5500 as EUR/GBP loses steam
• EUR/USD hammered accross the board as cross selling amplifies losses to 14040

As we approach the holidays the currency market has taken on all the characteristics of Florida weather – just wait a minute and it changes. After completing a spectacular parabolic  rise  yesterday, the unit reversed course and produced an almost as impressive a fall in today’s early European trade. The pair went into a nose dive dropping more than 200 points in 20 minutes as it hit a low of 1.4040 before bouncing above 1.4100. 

The sharp unwind was exacerbated by the euro selling on the crosses, especially EUR/GBP which only yesterday reached the stratospheric highs of 9550 before dropping to 9350 in today’s session. The remarkable volatility has no doubt been amplified  by lack of liquidity in holiday thin markets, but the primary impetus behind today’s downside move was most likely caused by yesterday’s ECB’s announcement to cut its deposit rates in effect discouraging market players with leaving money at the central bank in their  desperate hunt for yield.

Some analysts have calculated that the sudden rise in the euro this week was equivalent to a 175bp worth of tightening, prompting EZ fiscal officials to raise concern over the volatility in the pair. However, today’s descent should ease some of those worries, assuming the EUR/USD does not stage yet another vertical rally by end of day. Given the fact that the strength in the  unit was driven strictly by yield considerations, yesterday’s ECB move may have broken the will of euro longs, and it appears that for now much of the steam has gone out of the rally.

Nevertheless, the currency markets remain the most treacherous capital markets in the world for the time being with unprecedented volatility the rule rather than the exception.  With no data of consequence in North American session to drive trade, volatility is likely to continue into Friday’s close. With euro bears having pushed the pair into the 1.4000 figure a stop run on the 1.4000 barrier now appears to be the next logical move.

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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.