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IFO Beats But Euro Rally Fizzles

Last updated 1/27/2009 5:27 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• IFO beats expecations as business sentiment improves
• Japan announces plan to help companiues hurt by financial crisis
• Siemens posts better than expected numbers sparking a rally in Europe
• Oil higher hitting $47/bbl
• Gold slips below $900/oz to $893/oz

Overnight Eco

• JPY CSPI -2.5% vs. - 2.4%
• AUD PPI 1.3% much hotter that 0.4% forecast
• AUD NAB Business Confidence -20 matching last month reading
• EUR German Import Prices -4.0% vs. -2.9% expeceted
• CHF UBS Consumption Indicator -4.0%
• EUR German Ifo Business Climate 83 vs. 81
• EUR Current Account -16.0B vs -8.0B eyed
• GBP CBI Realized Sales n/a

Event Risk on Tap

• USD S&P/CS Composite-20 HPI expected at -18.0%
• USD CB Consumer Confidence expected at 37.9
• USD Richmond Manufacturing Index expected at -49

Price Action

• USD/JPY above 8900 but 9000 proves tough to break despite rally in equities
• AUD/USD spiks to 6700 as risk and hotter PPI fuels rally
• GBP/USD runs through 1.4200 on massive short covering before stalling
• EUR/USD rises to 1.3300 on better IFO

The EUR/USD rallied through the 1.3300 level in early European session on the back of better that expected IFO results, but couldn’t hold that level for long as profit taking pushed equities lower and curbed some of the risk appetite that dominated overnight trade. The IFO survey of business climate surprised to the upside printing at 83 versus  81  forecast  while the current assessment component also beat expectations coming in at 86.8 versus  85 projected.

Although the current assessment reading was actually worse than the month prior, reflecting the deteriorating conditions  in the manufacturing sector, the overall  IFO  report suggested that at least for the time being sentiment amongst  European business leader appears to have stabilized. As we noted earlier, “One key variable that tends to correlate well with the IFO readings is the price of oil and recent declines in energy costs  contributed significantly to savings on the supply side serving  as a positive offset to the persistently dour conditions on the demand side.”

Despite the fervent hope of euro bulls that a bottoming out process may be taking shape, we continue to have our doubts that economic conditions in Eurozone have truly stabilized.  The region has yet to see the brutal impact of rise in unemployment that is sure to come as the export sector cuts capacity and today’s positive economic news is more indicative of a pause rather than an end to that contraction. Nevertheless, today’s better IFO numbers along with yesterday surprising rise in US LEI data have clearly stoked risk sentiment amongst investors leading to a furious short covering rally in euro, pound and Aussie.

Looking ahead to the North American session the tenor of the equity markets will no doubt dominate the tone of trade in currencies.   Today’s US consumer confidence data   could be key to setting direction for both markets. Yesterday’s US equity trading clearly demonstrated hesitation on the part of most investors as the markets could not quite bring themselves to believe the better than forecast economic news. If  today’s consumer sentiment data proves positive, it may serve as a catalyst for a broader stock market rally which in turn will fuel gains in euro pound and Aussie.  If on the other hand US equities show no bounce, tonight’s risk assumption rally could fizzle by day’s end as EUR/USD& nbsp; drops back below 1.3200.

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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.