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Risk Under Assault - Can Euro Hold 1.3000?

Last updated 7/30/2010 5:30 AM ET (GMT -5) 4 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• German Retail Sales miss their mark -0.9% vs. 0.0% eyed
• Chinese PMI rumored to have slipped below 50
• Nikkei drops -1.64%, Europe lower -0.6%
• Oil drops below $78/bbl
• Gold quiet at $1168/oz.

Overnight Eco

• AUD Private Sector Credit m/m 0.2% vs. 0.4%
• JPY Manufacturing PMI 52.8 vs. 53.9
• JPY Household Spending y/y 0.5% vs. -0.8%
• JPY Tokyo Core CPI y/y -1.3% vs. -1.2%
• JPY Prelim Industrial Production m/m -1.5% vs. 0.2%
• JPY Housing Starts y/y 0.6% vs. 1.7%
• NZD Building Consents m/m 3.5% vs. -9.5%
• EUR German Retail Sales m/m -0.9% vs. 0.0%
• EUR Unemployment Rate 10%
• GBP GfK Consumer Confidence -22 vs. -21

Event Risk on Tap

• CAD GDP m/m
• USD Advance GDP q/q
• USD Advance GDP Price Index q/q
• USD Employment Cost Index q/q
• USD Chicago PMI
• USD Revised UoM Consumer Sentiment
• USD Revised UoM Inflation Expectations

Price Action

• USD/JPY conitinues to move lower to 86.30 as fears over US growth weigh
• AUD/USD remains within reach of .9000 on month end flows
• GBP/USD quiet around 1.5600
• EUR/USD drops below 1.3050 as profit taking kicks in

Euro ran into a wall of profit taking falling against the dollar and all the other major currencies in early European trade today, after German Retail Sales missed their mark and risk aversion fears spread ahead of the US GDP data due later in the day. German Retail Sales printed at -0.9%  versus expectations of a flat number producing the first negative economic surprise from the region this week. The data was especially shocking given the improvement in consumer sentiment surveys and better than expected readings in business and labor market gauges. The news suggests that the final demand in the 16 member union remains fragile as the consumer attempts to recover for the worst recession in the post war era.

The sharp decline in the Retail Sales numbers took the wind out of the euro rally and after staging a modest attempt to retake the 1.3100 handle, the pair came under heavy selling assault dropping to a low of 1.3027 before finding near term support.  As we noted earlier, “So far this year’s Retail Sales results have been highly uneven with 3 months down, three up and one month flat indicating that retail demand is still attempting to stabilize before it can begin to increase steadily as growth improves.” Meanwhile, the pressure on the euro is likely to remain  for the rest of the night  and could accelerate if the US GDP data prints below expectations, reviving fears of a global slowdown in growth in H2 of 2010.

The risk trade was also hampered by rumors that next week’s Chinese PMI data may print below 50 indicating a slip into contraction territory in more than a year. If that were the case that would certainly trigger more risk aversion flows with USD/JPY likely slipping to test the 85.00 figure in the foreseeable future. The pair made a feeble attempt to break above the 88.00 handle this week, but yesterday’s dour US Durable Goods numbers quashed any hopes for a sustained rally as US yields once again slipped below 3% on the 10 year.

Today in North America the GDP data at 12:30 GMT and the Chicago PMI readings at 13:45 GMT could prove to be the critical factors to directionality as we move into the weekend. The GDP is forecast at 2.5% versus 2.7% the period prior, but with deterioration in US retail sales and trade in Q2, the possibility of weaker than projected print in relatively high. Furthermore, while the GDP news will offer the market a look at the past, the Chicago PMI report could provide traders with a glimpse of the future and to that extent may be the more important piece of news to consider. Expectations are already low at 56.1 versus 59.1 but if the PMI report prints even lower it could unleash a larger wave of profit taking into the close of the week with USD/JPY likely breaking the 86.00 barrier while euro gives up the 1.3000 figure that it took out just yesterday.

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Comments (4)

Demax

July 30, 2010 at 06:11 AM ET

It's the end of the month... and someone blinked.

I think it's just profit taking / book squaring Boris.

bschlossberg

July 30, 2010 at 06:40 AM ET

Data didn't help

datura

July 30, 2010 at 08:32 AM ET

someone could you explain to me .what is the corelation of eur usd jpy.when dollar gains against euro and other curriencies ,but it loses against jpy. when euro gains against dollar.also dollar gains against jpy.it is a little bit weird situation.
please someone explain to me.

Semaj

July 30, 2010 at 02:32 PM ET

There is a very slight negative to almost zero correlation between the eur/usd & the usd/jpy. It's more about risk appetite. Risk up = equities/global mrkts up = dollar down = jpy down (yen pairs up) and vise versa. That's the way it's been lately but it could change someday in the future. Hope that helps.

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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.