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Euro Retakes 1.4000 At Start of Holiday Week

Last updated 12/22/2008 4:25 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Obama targets 3M new jobs
• Japanese exports fall at record pace
• Toyota cuts guidance after close of Nikkei, S&P puts AAA rating on watch
• Nikkei closes up +1%
• European equities lower on the open
• Gold bit below $850/oz.
• OIl at $42/bbl

Overnight Eco

• NZD Current Account -5.99 B as forecast
• JPY Trade Balance -0.37T worse than -0.22T projected
• AUD New Motor Vehicle Sales big drop -5.2% from -0.5% last
• NZD Westpac Consumer Sentiment 101.3 vs. 104.8 last
• EUR GfK German Consumer Climate 2.1 in line
• EUR German Import Prices plunge -3.4% vs. -2.6% forecast

Event Risk on Tap

• Calendar empty

Price Action

• USD/JPY moves through 90.00 on better equity flows but comes off the handle in early Europe
• AUD/USD runs back to 6850 on overall dollar weakeness in quiet trade
• GBP/USD makes another run at 1.5000 but lags as EUR/GBP flows weigh
• EUR/USD rebounds from liquidation on Friday as stops squeeze move tio 1.4100

Evidence of oncoming holidays was all around the currency market tonight, as trading slowed to a crawl and the economic calendar was essentially barren of any significant data. Nevertheless, the euro managed to stage a rebound rally pushing above 1.4000 once again as better risk appetite in Asian markets and the oversold conditions in the unit created a perfect set up for a short covering bounce.  

Despite ECB’ s ardent attempts to limit the yield advantages of the unit,  the euro remains the flavor of the month  as the rest of the G-4 currencies sink ever closer towards the zero rate target. Nowhere is this better seen than in the EURGBP cross which once again scaled the 9400 barrier after a short profit taking respite on Friday. Tomorrow, UK GDP  data is due and some analysts forecast that  Q2 GDP may be revised to negative from flat indicating that UK economy is already in an official recession. Were this to occur it would almost assure a -100bp rate cut from the BoE in January putting UK rates at only 1% yield.

Little wonder then, that cable, after making a half hearted attempt at the 1.5000 level in early European trade was hammered once again back below 1.4860, pushing the EURGBP cross towards another run at the 9500 level.  There is no doubt that the pair is grossly overbought, but such is the power of momentum in the currency market at this time that EUR/GBP may well make a run to parity especially if UK data continues to deteriorate further.

With North American calendar utterly empty of any event risk today, the choppy trade could continue into the US session.  After last week’s parabolic climb and nearly as dramatic a fall, EUR/USD appears to have found  a new level of support at the 1.4000 figure. The  yield considerations will continue to favor the euro for the time being, but the question of just how long it can maintain its advantage remains to be seen. As we’ve noted before 2009 promises to be a challenging year for the EZ and if the  unemployment rate begins to climb in Germany, ECB will be forced to follow the rest of its colleagues towards a near ZIRP environment, despite their distaste for such policy.  In the meantime, the holiday trade should temper the volatility and prices will likely pivot around the 1.4000 level for the rest of the day.

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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.