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Credit Concerns Continue to Dominate FX Trade

Last updated 9/14/2011 5:06 AM ET (GMT -5) 1 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Barrosso comments lift FX after French bank downgrade
• UK Claimant Count better but ILO employment drops
• Nikkei off -1.17% Europe up .75%
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• Gold at $1830/oz.last

Overnight Eco

• AUD Westpac Consumer Confidence (SEP) 8.1% vs. -3.5%
• JPY Industrial Production (YoY) (JUL F) 0.4% vs. 0.6%
• CHF Producer & Import Prices (MoM) (AUG) -1.2% vs. -0.3%
• EUR Euro-Zone Industrial Production w.d.a. (YoY) (JUL)
• GBP Jobless Claims Change (AUG) 20.3K vs. 34.8K
• GBP Claimant Count Rate (AUG) 2.8%
• GBP ILO Unemployment Rate (3M) (JUL) 7.9%

Event Risk on Tap

• USD Advance Retail Sales (AUG)
• USD Producer Price Index (YoY) (AUG)
• USD Producer Price Index Ex Food & Energy (YoY) (AUG)
• USD Producer Price Index (MoM) (AUG)
• USD Producer Price Index Ex Food & Energy (MoM) (AUG)
• USD Retail Sales Less Autos (AUG)
• CAD Capacity Utilization Rate (2Q)

Price Action

• USD/JPY remains below 77.00
• AUD/USD dips below 1.0200 on risk aversion flows
• GBP/USD trades near 1.5750 as labor data mixed
• EUR/USD rebounds to 1.3650 after Barrosso comments

Risk FX recovered some of its losses in early European trade after European Commission President Jose Manuel Barroso said options for the introduction of euro area bonds would soon be presented. Earlier in Asian session high beta currencies came under sustained selling pressure after Moody downgraded Soc Gen and Credit Agricole.

Moody's cut SocGen's  debt and deposit ratings by one notch to Aa3 from Aa2. The ratings service said that although SocGen's "capital base currently provides an adequate cushion to support its Greek, Portuguese, and Irish exposures ... it will extend its review for downgrade of the C+ BFSR (Bank Financial Strength Rating) to consider the implications of the potentially persistent fragility in the bank financing markets, given its continued reliance on wholesale funding." For Credit Agricole, Moody's downgraded its BFSR by one notch to C from C+, and cut its long-term debt and deposit ratings by one notch to Aa2 from Aa1.

The move is a reflection of the concern regarding the stability of the European financial sector in the wake of the mounting problems in Greece. Greece remains the focal point of trade as fears of its possible bankruptcy and the unknown ramifications of such an event on the European financial system  continue to push risk FX lower. Today’s  meeting between French, German and Greek officials could provide some relief to the market if officials indicate that bailout funds will be forthcoming, but the mood remains grim as risk aversion threatens to push high beta currencies to fresh  monthly lows as the day proceeds. 

Meanwhile on the economic front UK labor data showed the largest rise in unemployment in 2 years as public sector jobs were cut and the economy failed to produce enough private sector demand to offset the losses. Nevertheless the data was not  nearly as dour as anticipated with claimant count rolls rising less than forecast at 20.3K versus 34.8K eyed. Still this was the sixth consecutive month of job losses for the UK economy indicating that growth in H2 of this year is likely to be lackluster at best.  Average earning rose by 2.8% versus 2.6% projected but were well below the inflation rate. Furthermore ex-bonus wages rose only 2.1% versus 2.3% eyed suggesting that BOE has little to fear from second round effects.

Overall the UK labor data showed further contraction, albeit at a slower pace than forecast indicating that the situation remains negative but is not yet dire and therefore may keep the BOE on sidelines for a while longer. Cable rose slightly on the news recovering from its Asian session lows of 1.5707 to trade 1.5770 in the aftermath of the release.  The currency continues to trade off risk flows rather than economic news as traders become increasingly concerned that UK banks may face exposure to the European credit problems. Therefore the unit is likely to take its cues from the continent  today as markets await the results of the Merkel/Sarkozy meeting with Greek finance minister.

In North American session the calendar carries US PPI data and  Retail Sales both of which are expected to dip slightly. Retail Sales are expected to decline to 0.2% from 0.5% the month prior but will likely have little impact on trade unless they print negative for the month, intensifying risk aversion flows. In short, events in Europe rather economic data are likely to continue to drive trade today until the situation in Greece reaches some sort of near term resolution.  

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Comments (1)

JBarr

September 15, 2011 at 10:05 AM ET

After the coordinated action today we can be sure that the Greek default is at hand. This is simply putting on the crash helmet before impact. The banking system will have the luxuary of the liquidity facility as the final act of the Greek tragedy is played out. Take short on the elevated EURUSD and sit back. 1.3886 will become 1.3500........

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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.