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Euro and Cable Caught in Risk Aversion Downdraft

Last updated 2/12/2009 5:54 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• China makes the biggest foreign investment deal ever of 17B in Rio Tinto
• Equities lower accross the board as doubts remain about effectiveness of US bailout
• US Retail Sales on tap in North American region
• OIl sports $35/bbl handle as demand continues to wane
• Gold at $945/oz. - $950 next?

Overnight Eco

• NZD Business NZ Manufacturing Index 42 against 42.5 last
• NZD FRI -0.2% against 0.3% expected
• AUD MI Inflation Expectations 2.3%
• AUD Employment Change better at 1.2K against -19.1K forecast
• AUD Unemployment Rate rises more than expected at 4.8%
• AUD NAB Quarterly Business Confidence -42 against -7 last
• CHF SECO Consumer Climate -23 vs. -38 projected
• EUR Industrial Production -2.6% against -2.3%

Event Risk on Tap

• USD Retail Sales expected at -1.0%
• USD Unemployment Claims
• USD Business Inventories expected at -0.6%

Price Action

• USD/JPY tests 8900 as risk avesrion accelerates in Europe
• AUD/USD loses 6500 handle after risk flows overcome earlier support from better labor data
• GBP/USD quantitatiev easing worries continue to weigh and EUR/GBP flows trip stops at 1.4200
• EUR/USD plumbs stops near 1.2800 as EUR/JPY flows push it lower before finding some support

The Asian equity markets reacted negatively to the news that the US stimulus package was ready for passage as traders grew increasingly skeptical about the bills efficacy to help revive the US economy. Most Asian equity bourses were lower by more than  -2% and the European markets followed suit with declines of more than -1% in early London and Frankfurt trade. 

The risk aversion flows hit EUR/USD, GBP/USD and AUD/USD hard as the pairs sold off by more than 100 points on the European open. Cable was particularly weak as traders continued to worry about the possible impact of quantitative easing on the currency. At the start of the week pound was trading near the 1.4900 handle but by today it managed to plumb lows at 1.4125. As we noted earlier, “should the risk aversion theme dominate for rest of the day the stops at 1.4000 will no doubt be targeted especially if US equities follow the rest of the world with a  triple digit sell off later in the day.”

Meanwhile on the economic front European Industrial Orders once again missed to the downside printing at -2.6% against -2.3% projected and fully 1% worse than the -1.6% contraction last month. The region’s industrial sector continues to face very difficult economic climate exacerbated by falling global demand and relatively tight credit conditions while European policy makers remain stationary as conditions deteriorate.

Looking to North American session  today, the trading focus will rest on the US Retail Sales data and the weekly jobless claims. The jobless numbers are now above the psychologically important 600K mark and consensus calls are for 610K print. Should the number dip below the 600K barrier it might provide much needed relief to the battered equity sector and reverse some of the moves in risk currencies.

On the other hand if the US data remains dour the downward pressure on stocks could accelerate. DJIA has closed below the 8000 level for two days in a row and should it fail to rally today bear sentiment will only grow stronger. That   in turn could spur further selling in euro and pound with 1.2700 and 1.4000 levels coming into play as the day progresses.

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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.