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Euro Rises as Risk Returns

Last updated 1/28/2009 4:43 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• FDIC may create "bad bank" for US toxic assets
• Equities firmer accross the board in Asia and Europe
• US House of represenattives will vote on stimulus bill today
• Oil continues to sink at $42/bbl last
• Gold just a tad below $900/oz still holding the break out levels

Overnight Eco

• AUD MI Leading Index -1.0%
• AUD CPI -0.3% vs. -0.4% called
• EUR GfK German Consumer Climate 2.2 vs. 2.0 eyed
• EUR German Prelim CPI n/a
• CHF KOF Economic Barometer n/a

Event Risk on Tap

• USD FOMC Interest Rate Decision expected at <0.25%

Price Action

• USD/JPY slightly above 8900 as equties rise
• AUD/USD shakes off weak LEI data and moves backl to 6700 as risk appetite improves
• GBP/USD climbs above 1.4300 as boost in risk helps
• EUR/USD probes 1.3300 on start of European trade but trades off those levels as morning progresses

Euro, pound and Aussies were all higher at the start of European trade boosted by improved sentiment towards risk as equity markets across the region rallied by more than 1.5% starting  the third day of the week on a somewhat brighter note. Part of the reason for today’s optimism has  to do with reports that President Obama’s stimulus plan has a provision to establish a “bad bank” that would acquire up to $1 Trillion worth of toxic US assets.

The news helped to rally financials as investors hoped that the plan would jumpstart the moribund sector which has been plagued with massive losses that have reduced most financial institutions to the point of insolvency. The  idea behind the “bad bank” structure is to effectively move most of these losses off the balance sheets of the banks and onto to the shoulders  of the federal government, which has the luxury of time and capital to possibly nurse some of these positions to back to profitability.

The critical unknown about this proposal  is the question of valuation. What price will the federal government pay for these assets and will it be enough to recapitalize the  banks and jumpstart the lending process? We continue to have our doubts about the efficacy of this approach, especially if unemployment continues to climb exacerbating the existent credit risk on the books which would short circuit any new lending plans. Given the cautious tone of trade, the currency market appears to agree with our thesis. After an initial burst higher, all the risk pair came off their highs with EUR/USD once again failing to hold the 1.3300 handle. This seesaw action is very emblematic of the uncertainty and confusion that reigns in the FX markets at moment, as risk currencies  attempt to rally from their grossly oversold  only to be met with  resistance by many skeptical sellers.

With economic calendar practically barren of any meaningful data, the focus today in North American trade will turn to the FOMC decision due at 17:15 GMT. With US rates down to 25bp – there virtually no room left for further monetary easing and the only question on the table is whether the FOMC will begin to use its balance sheet to purchase long term Treasury debt in a move towards quantitative easing. Such a turn in policy is likely to be dollar  negative as FX traders will view  it as a further attempt to dilute the value of the currency. However, perhaps the most likely outcome will be a distinct lack of volatility. As our colleague Kath Lien noted yesterday having reached near ZIPR-like conditions, the Fed rate announcements decisions could take on all the characteristics of the BOJ press conferences which elicit virtually no movement in the currency market at the present time.

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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.