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Euro Selloff Continues as 1.2700 Gives Way

Last updated 9/8/2010 5:20 AM ET (GMT -5) 1 Comments

Overnight Eco

AUD Home Loans m/m 1.7% vs. 1.1%
JPY Core Machinery Orders m/m 8.8% vs. 1.9%
JPY Bank Lending y/y -1.9%
JPY Current Account 1.46T vs. 1.38T
JPY M2 Money Stock y/y 2.8% vs. 2.6%
JPY Economy Watchers Sentiment 45.1 vs. 50.3
EUR German Trade Balance 13.5B vs. 13B
EUR German Industrial Production m/m n/a
GBP Manufacturing Production m/m 0.3% vs. 0.3%
GBP Industrial Production m/m 0.3% vs. 0.4%

Event Risk on Tap

CAD Building Permits m/m expected at -5.8%
CAD Overnight Rate expected at 1.00%
CAD Ivey PMI expected at 55.8
USD Consumer Credit m/m expected at -5.4B

Price Action

USD/JPY rallies to 83.70 as short covering an jawboning keeps shorts on guard
AUD/USD rallies to .9170 but risk aversion knocks it back .9140
GBP/USD outperforms but loses session highs after IP/MP just meets consensus
EUR/USD pressured again as 1.2700 gives way with 1.2650 in view

After rebounding slightly during the Asian session the EUR/USD came under a fresh assault breaking below the 1.2700 barrier in early morning European trade as jitters over the financial state of the peripheral economies continued to pressure the pair. Greek government bonds weakened further trading at nearly 1000bps premium to German bunds after Eurostat stated that Greece has yet to fully disclose all of its currency swaps designed to conceal its deficit financing of the past decade. Adding to Greek woes was an announcement by National Bank of Greece that it incurred a 2.8 Billion euro capital increase to further prop up its balance sheet.

The sovereign debt problem of the periphery economies continues to haunt the euro as traders return from their summer holiday and nowhere is this concern more evident than in the price action of EUR/CHF which made yet another record low today trading to 1.2766 before staging a mild rebound. With nearly 80 Billion euros of new issuance due this month out of the periphery economies, the price action in the credit markets is likely to be the critical driver of trade for EUR/USD this week.

On the economic front the data was relatively uneventful with German Trade Balance printing essentially in line, but exports weakening for only the second time this year. As we noted earlier, “Although the decline in exports was relatively slight it does indicate that the country’s critical export sector may have peaked in the second quarter of 2010 when EUR/USD had tumbled to below 1.2000 exchange rate providing a particularly favorable background for trade.” If German growth does indeed slow as we approach the end of this year, the downward pressure on the euro will only increase as traders begin to fear the fact that the region's strongest economy may have peaked this summer.

In UK today, the news was mildly bullish helping the pound to handily outperform the euro. UK Halifax housing survey, provided an initial boost when it rose unexpectedly for the second month in a row, increasing by 0.2%. Housing remains the critical asset for the UK economy and any signs of stability are viewed positively by the market. Meanwhile both Industrial and Manufacturing Production rose as expected by 0.3% and given the weakness of the PMI Manufacturing data last week, today news was greeted with relief. Cable spiked to within 5 pips of the 1.5500 level but traded off the session highs to settle at 1.5440 ahead of North American open. The unit is clearly benefiting from euro’s misery, but we continue to believe that any rally in sterling will be limited in scope as the UK economy will soon face austerity problems of its own.

In North American trade today, the focus will be on the BOC rate decision at 13:00 GMT. The market expects the normalization process to continue with rates rising to 1.00%. However, we think the BOC remains very cautious in its economic outlook with Canada still very vulnerable to any slowdown in the US, despite its strong commodity base. Therefore the BOC is likely to dampen any expectations of further rate hikes and will likely look to this Friday’s employment report to gauge the strength of the recovery before making any additional policy choices.

FX Upcoming

Currency	GMT	EST	Release	Expected	Prior
CAD	12:30	8:30	Building Permits m/m	-5.8%	6.5%
CAD	13:00	9:00	Overnight Rate	1.00%	0.75%
USD	14:00	10:00	Ivey PMI	55.8	54.0
USD	19:00	15:000	Consumer Credit m/m	-5.4B	-1.3B

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Comments (1)

thaddeusjon

September 08, 2010 at 05:30 PM ET

France was shutdown basically because of a nation wide strike. They did not post their NFP numbers and thus the Euro 's early morning fall was due to Germany's "off " numbers. I have four questions. One, when will the French employment numbers be announced? Will the French NFP number's be discounted in the future? Or will this cause another drop in the Euro ( short term)? and thirdly, I understand that the UK is is part of the EC, but why would good news about their economic situation bolster the Euro in trading, when the UK still uses their own denomination?

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.

currency		trade idea
CAD/JPY Long term Opened 2/10/2012		Long from 77.6500 Stop at 76.65 Target at 78.9
GBP/CHF Medium term Opened 2/8/2012		Short from 1.4470 Stop at 1.4602 Target at 1.4352
AUD/CAD Medium term Opened 2/6/2012		Long from 1.0740 Stop at 1.0655 Target at 1.085

Euro Selloff Continues as 1.2700 Gives Way

Boris Schlossberg

Director of Currency Research, GFT