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Euro Recovers From Downgrade News But Rally Capped

Last updated 9/20/2011 5:31 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• S&P downgrades Italy but impact on EUR/USD limited
• RBA remains relatively hawkish
• Nikkei down -1.61% Europe up 1.00%
• Oil at $86.20/bbl
• Gold below $1800 at $1790/oz.

Overnight Eco

• CHF SECO September 2011 Economic Forecasts
• CHF Trade Balance (Swiss franc) (AUG) 0.81B vs. 1.97B
• EUR German ZEW Survey (Economic Sentiment) (SEP) 43.6 vs. 40
• EUR Euro-Zone ZEW Survey (Economic Sentiment) (SEP) -44.6 vs. -42.3

Event Risk on Tap

Price Action

• USD/JPY quiet at 76.50
• AUD/USD rebounds to 1.0240 after hawkish RBA
• GBP/USD holds 1.5700 in listless trade
• EUR/USD rebonds from 1.3600 selloff as risk picks up in Europe

EUR/USD rebounded from a selloff in early Asia trade after S&P downgraded Italian sovereign debt, but the pair’s rally stalled at the 1.3700 level as credit concerns continued to dog the unit. Currency markets saw a very choppy session as euro first tumbled below 1.3600 on the downgrade news as well as rumors that Greece was considering a national referendum on leaving the EZ. Additionally and article in FT suggesting the Siemens withdrew 500M euro from a French bank to put on deposit with ECB also spurred some risk aversion flows. However, the pair recovered towards 1.3700 in a fierce short covering rally at the start of European session trade after both rumors were denied.

In its assessment the S&P noted that more subdued external demand, weak political leadership, increasing cost of funding and new budget austerity measures are all likely to dampen growth going forward. Slower growth could in turn cause Italy to  miss its fiscal targets set for next year as it generates a revenue shortfall.

The downgrade could increase Italy’s  borrowing costs just as the country  embarks on large refinancing program that entails nearly 30 Billion euros of gross issuance in October and November. These upcoming bond auctions could become the true test of country’s credit strength and if investors balk at rolling over its debt the downward pressure on the euro could quickly accelerate.

On the economic front the German ZEW survey printed just slightly better than forecast at 43.6 vs. 40 eyed and the euro popped on the news as market were relieved that the reading was not worse given the recent turmoil in the financial markets. Meanwhile German PPI printed at -0.3% versus 0.1% eyed suggesting that price pressures in the EZ are beginning to abate.

In Australia the RBA minutes revealed that the central bank is much less dovish than the market believes with policymakers providing no hint whatsoever that they intend to cut rates anytime soon.  Instead Australian monetary authorities indicated that the RBA is likely to remain stationary through the end of this year as they assess the slowdown in global economic demand before embarking on any change of course in policy. The Aussie bounced from 1.0160 as a result and was pushed higher towards 1.0250 on better risk flows during the European trade. With markets now forced to reassess their bearish view on Australian rates, the Australian dollar is likely to remain bid on relatively basis against both euro and cable as it continues to benefit from interest rate differentials.

With US calendar once again barren of any meaningful data, North American trade could be choppy as well with focus still on Europe as Greece continues to negotiate with troika. Although market assumptions are that a deal will be done, so far the parties have agreed to nothing and any unexpected delays in the bailout talks could trigger another selloff towards the 1.3600 level 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.