Cable Hits 5 Month High as Risk Rally Rolls On

Last updated 7/28/2010 6:12 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Australian inflation much softer than expeceted at 0.6% vs. 1.0%
• BOE's King - Austerity budget no threat to growth
• Nikkei up 2.7% Europe higher by 0.6% at open
• Oil at $77.40/bbl
• Gold drops further to $1161/oz.

Overnight Eco

• AUD CPI q/q 0.6% vs. 1.0%
• AUD Trimmed Mean CPI q/q 0.5% vs. 0.8%
• NZD NBNZ Business Confidence falls for third month in a row 27.9 vs 40.2
• EUR German Prelim CPI m/m
• GBP BOE Gov King Speaks

Event Risk on Tap

• USD Core Durable Goods Orders m/m expected at 0.6%
• USD Durable Goods Orders m/m expected at 0.9%
• USD Crude Oil Inventories
• USD Beige Book

Price Action

• USD/JPY takes out 88.00 as recovery flows pick up pace
• AUD/USD weak inflation drops it below .9000
• GBP/USD makes a fresh 5 month high of 1.5600
• EUR/USD above 1.3000 but 1.3050 still unattainable

Risk trade continued to be supported in Asian and early European trade today with both euro and pound making fresh highs, but Aussie was felled by softer inflation data and tumbled below .9000 as expectations of additional RBA rate hikes during the summer evaporated. The euro rose to a high of 1.3043, boosted by better EUR/JPY flows as the Nikkei saw a sharp 2.7% increase. The pair, however, continues to fail at the 1.3050 level as traders remain cautious ahead of US economic data later in the day.

In Asia Pacific the very weak Australian CPI numbers which printed at 0.6% versus 1.0% eyed, put a cap on the AUD/USD rally and the pair tumbled to a low of .8925 in late Asian trade. The news that price levels have stabilized despite impressive Australian economic growth suggests that the RBA will keep rates on hold in August and most likely in September as well.

As we noted earlier, “The Aussie could underperform the other high beta currencies over the near term. It may especially slip further against the New Zealand dollar if at today’s RBNZ rate announcement, Governor Bollard reaffirms his commitment to rate normalization suggesting that there will be more rate hike to come.”  However, given the very weak NBNZ business confidence data which declined for the third month in a row to 27.9 form 40.2, chances are strong that Governor Bollard may be a bit more circumspect  in his monetary policy and may prefer to pause after this rate hike in order to assess the strength of the economic recovery.

In UK, cable rose to 5 month high, breaking through the 1.5600 barrier before dipping below there ahead of typically cautious testimony by BOE officials in front of Parliament. The MPC official revealed little new information although they assumed a more hawkish posture with Andrew Sentence characteristically noting that the UK economy has turned around but inflation risk has not diminished. Meanwhile BOE Governor Mervyn King appeared to be a bit more optimistic stating that he did not believe that the UK austerity budget created a significant risk to growth.

We remain skeptical of the UK recovery story, but for the time sterling continues to benefit from positive capital flows into global equity markets and until that dynamic exhausts itself the path of least resistance for the unit is up with some traders targeting 1.5800 by week’s end if risk flows prove supportive.    

The pick in investor optimism regarding the strength of the recovery into  the second half of the year has helped to rally 10 year US Treasury yields above the key 3% barrier and as result USD/JPY has bounced off its recent lows and broke through the 88.00 level in early European trade today. Despite the relatively lackluster US economic data, the market ia anticipating a pick up in activity after a stall in Q2. Today’s Durable Goods report could be the key to further upside if it manages to beat market expectations of 0.6% rise.

With recovery trade bulls firmly in control of the price action over the past several days  the positive economic data has been accentuated, while negative reports have been minimized. Yesterday’s very poor Consumer confidence numbers were justified on the assumption that they did not dip below the 50 level while Monday's existing home sales report, which was the second worst sales month in history was lauded because it beat very muted expectations. Given this dynamic  only a sharp downside surprise in US data could scuttle this rally.

FX Upcoming

Currency	GMT	EST	Release	Expected	Prior
USD	12:30	8:30	Core Durable Goods Orders m/m	0.6%	1.6%
USD	12:30	8:30	Durable Goods Orders m/m	0.9%	-0.6%
USD	14:30	10:30	Crude Oil Inventories		0.4M
USD	18:00	14:00	Beige Book

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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.