All Trade Ideas and trading scenarios found on FX360.com are hypothetical. FX360.com has not placed these Ideas in a live trading environment. Forex Trading involves high risks, with the potential for substantial losses that exceed your initial deposit and is not suitable for all persons. Past performance is not necessarily indicative of futures results.

Euro Hit As Sovereign Debt Fears Resurface

Last updated 9/7/2010 5:07 AM ET (GMT -5) 0 Comments - Add your comment

• Share this:

Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• RBA Leaves Rates Unchanged, Labor secures victory
• Euro pressured on fresh sovereign debt concerns
• Nikkei off -0.8% Europe lower as well
• Oil drops a buck to $73.45/bbl
• Gold steady at $1250/oz.

Overnight Eco

• AUD AIG Construction Index 43.2 vs. 43.3
• AUD Cash Rate 4.5%
• JPY Overnight Call Rate 10bp
• JPY Leading Indicators 98.2% vs. 98.3%
• EUR German Factory Orders m/m n/a
• GBP BRC Retail Sales Monitor y/y 1.0% vs. 0.5%

Event Risk on Tap

Price Action

• USD/JPY breaks 84.00 as risk aversion picks up
• AUD/USD drops to .9100 as politics, economics weigh
• GBP/USD rally to 1.5400 loses steam but BRC offers a bright spot
• EUR/USD massacred on fresh sov. debt concerns with 1.2750 giving way

The euro was massacred on the second trading day of the week falling more than 150 points in overnight trade after a  Wall Street Journal article suggested that this summer’s bank stress tests were insufficient raising fresh concerns in the FX market regarding the quality of sovereign debt in the  region. The WSJ article claimed that the tests published in July understated the banks holdings of potentially risk sovereign debt. The Journal noted that, “Some banks excluded certain bonds, and many reduced the sums to account for ‘short’ positions they held—facts that neither regulators nor most banks disclosed when the test results were published in late July.”  

The WSJ story comes at  particularly sensitive time for the EZ as peripheral economies in the region prepare for a fresh round of financing this month estimated at 80 Billion euros. If the capital markets begin to balk at  rolling over  the debt of PIIGS the widening out of spreads between German bunds and  bonds of peripheral economies will put further  pressure on the euro in the days ahead.

Over the past several months the core economies of Europe such as Germany and France have seen a marked improvement in economic activity, but the recovery for the rest of the monetary union has been absent with Greece still contracting under the burden of austerity cuts while Spain remains mired in a structural recession caused by rigid labor laws and the aftereffects of the blow up of  a massive housing bubble. The euro, which last week staged a rally based on growth outperformance vis a vis the US, starts this week on a decidedly more shaky ground as problems in the periphery economies come back to haunt it once again. Additionally, Friday’s better than expected NFPs have eased the worries of a double dip recession in the US alleviating some of the downward pressure on the buck.  

Elsewhere today, in Australia the RBA left rates unchanged but the focus was on politics as the Labor party finally won the right form a coalition government after securing enough votes from independents. The Labor win means that it will proceed with its plans to institute a new tax on the country’s mining sector.     Although the mining tax is likely to be much more benign that its original proposal it is nevertheless seen as putting a damper on the country’ s key export sector and generally viewed as a negative development for the Australian dollar.  As we noted earlier, “One key reason for RBA’s reticence to tighten monetary policy further is because it does not want exacerbate what is likely to be a more restrictive fiscal policy climate.”

With no economic data scheduled for the North American session, trading is likely to be driven by price action in other asset markets and if equities decline further the pressure on the euro is likely to remain for  the rest of  the day with shorts targeting 1.2700. This currency markets are clearly concerned about the financing issues of the peripheral economies irrespective of any economic growth in core Europe and if the credit markets prove reluctant to provide additional capital, EUR/USD could quickly sell off to 1.2500 while EUR/CHF will continue to make fresh record lows.

FX Upcoming

The information, including Commentary and Trade Ideas, provided on FX360.com should not be relied upon as a substitute for extensive independent research which should be performed before making your investment decisions. Global Forex Trading and FX360 .com is merely providing this information for your general information. The information and opinions presented do not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision and should tailor the trade size and leverage of their trading to their personal risk appetite. Any projections or views of the market provided by FX360.com may not prove to be accurate.

The views of the authors and analysts are not necessarily those of Global Forex Trading, its owners, officers, agents or other employees. FX360.com and the currency research team will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained on FX360.com. Global Forex Trading and the currency research team do not render investment, legal, accounting, tax, or other professional advice. If investment, legal, tax, or other expert assistance is required, the services of a competent professional should be sought.

Loading...

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.