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Euro Data Dour, But Risk Returns to the Currency Market

Last updated 2/13/2009 5:44 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• German GDP contracts at worst rate since reunification
• US Stimulus may pass Congress today, Gregg bows out as Commerce Sec
• G-7 starts meeting today - focus on coordinated resposne to global economic crisis
• OIl below $35/bbl
• Gold remains above $940/oz

Overnight Eco

• NZD Retail Sales -0.6% against -0.2% called
• EUR German Prelim GDP worse at -2.1% vs. -1.8%
• EUR French Prelim Non-Farm Payrolls -0.6% vs. -0.5% eyed
• EUR French Prelim GDP -1.2%
• CHF PPI -0.8% against -0.1% as deflation threatens
• EUR Flash GDP -1.5% versus -1.3% eyed

Event Risk on Tap

• CAD New Motor Vehicle Sales expected at -15.0%
• USD Prelim UoM Consumer Sentiment expected at 61.5

Price Action

• USD/JPY up nearly a figure as risk appetite returns
• AUD/USD runs to 6650 as risk revives
• GBP/USD strongest of all as it bounces to 1.4600 after yesterday's drubbing
• EUR/USD holds 1.2900 despite weak GDP data

Despite much worse than expected GDP data EUR/USD held its ground near the 1.2900 level for most of Asian and early European trade today as risk appetite returned to the FX market. The return of risk sparked a strong rally in cable and Aussie all night long and sent USD/JPY flying towards the 9200 handle.

European GDP contracted by -1.5% versus -1.3% expected while German output fell by a whopping -2.1% versus -1.8% forecast, registering its worst reading since the reunification of the country. Despite the dour data, or perhaps because of it risk assumption was back in vogue today as traders bet that the worse than expected GDP results would spur the ECB to action sooner rather than later.

We have been writing for a while that trade dynamics in the FX market have changed radically this year, with speculators rewarding aggressive fiscal and monetary policy action rather than yield. To that end cable which has seen numerous aggressive initiatives from the UK government to revive the UK economy, rebounded strongly today rising more than 200 points after several; days of heavy profit taking.

With G-7 serving as the key event risk for this week-end, both equity and currency investors are  hoping that the gravity of the current economic crisis will force officials cooperate and coordinate greater economic stimulus programs in the world's most advanced economies. Furthermore with Obama stimulus package now  almost a done deal, the equity markets are providing a positive background to FX trade as yesterday late session rally in the DJIA continued in Asian and European bourses today.

Thus, with investment sentiment relatively sanguine, the North American session sets ups with a positive tone for the risk currencies with euro, pound and Aussie likely to extend their rallies if US equities trade higher. However, the critical question for this final day of the week is whether equity investors will  feel confident enough to hold their longs over the week-end. For now the bet is that the G-7 meeting will prove friendly to capital markets,especially if officials take a firm stand against the creeping protectionism amongst it members. If however the G-7 meeting disappoints risk aversion will make a swift return and greenback and the yen will be bid once again.

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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.