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Euro Breaks 1.3050 As Risk Rally Extends

Last updated 7/29/2010 4:40 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• RBNZ Hikes Rates to 3% but signals a halt to future hikes
• Germnan unemployment in line at -20K
• Shanghai hits 2 month high, Europe up mildly
• Oil slips below $77/bbl
• Gold at $1166/oz. last

Overnight Eco

• JPY Retail Sales y/y 3.2% vs . 3.3%
• NZD Official Cash Rate 3.0%
• NZD RBNZ Rate Statement
• NZD Trade Balance 276M vs. 359M
• EUR German Unemployment Change
• GBP Nationwide HPI m/m -0.5% vs. -0.2%
• GBP Net Lending to Individuals m/m 0.6B vs. 1.3B eyed
• GBP Final Mortgage Approvals 48K as expected

Event Risk on Tap

• CAD RMPI m/m expected at 1.1%
• CAD IPPI m/m expected at 0.6%
• USD Unemployment Claims expected at 456K

Price Action

• USD/JPY drops back to 87.10 before bouncing as margin rule change triggers liquidation
• AUD/USD recovers .9000 as risk appetite rises
• GBP/USD holds above 1.5600 in quiet trade but decline net lending weighs slightly
• EUR/USD takes out 1.3050 as eco data shows improvement

Risk FX enjoyed a mild rally in early European trade but failure to produce yet another upside economic surprise caused EUR/USD to stall just ahead of the key 1.3050 level. (Note as we go press the euro has taken out the 1.3050 handily and now looks ready to target 1.3100) German unemployment reported right in line with expectations as -20,000 jobless were taken off the rolls versus forecast of -19,000 while the adjusted unemployment rate remained at 7.6%.

The markets were primed for another upside reading given the strong PMI and IFO reports last week, and the in-line print took some of the momentum away from the bulls. However, the labor data tonight continue to point to an improving economic picture in Eurozone’s largest economy and provides further fundamental support for the euro.  The decline in joblessness along with better readings from sentiment surveys suggest that tomorrow’s German Retail Sales could beat expectations and add yet more momentum to the virtuous cycle as the consumer joins the economic recovery in the region.

The single currency made yet another run at 1.3050 level at the start of European trade but just failed to take out stops. Nevertheless, barring any sudden waves of risk aversion, currency  traders now believe it is only matter of time that the level will fall given the generally positive risk environment in capital markets today as the Shanghai index hit a 2 month high. (Note as we go press the euro has taken out the 1.3050 handily and now looks ready to target 1.3100)

In Asia Pacific  the news a bit more subdued as the RBNZ raised rates as expected to 3% but offered a more somber outlook on the future stating that “the pace and extent of further official rate increases is likely to be more moderate than projected in the June statement.” We noted yesterday that given the weak reading in NBNZ confidence survey the chances of RNBZ halt were high. Today’s New Zealand Trade Balance data which missed the mark by printing at 276M versus 359M eyed, suggests that kiwi economy is indeed slowing down with exports declining by more than 9%.

In North America today, the focus will fall on the weekly jobless claims number with markets anticipating an improvement to 457K from  464K the period prior.  If the number exceeds the estimates and breaks below the key 450K level, it could spur another wave of risk assumption and push the EUR/USD through 1.3100 in early New York trade. As we wrote yesterday, with fears over the double dip recession scenario quickly evaporating, currency markets have adopted a clear pro-risk bias and any eco data that even mildly supports that thesis is likely to provide a boost for high beta FX.  

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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.