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Risk FX Gives Up Gains as Bank Worries Resurface

Last updated 10/13/2011 5:09 AM ET (GMT -5) 1 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• IT auction and concerns over EU banks send risk lower in Europe
• AUD employment beats forecasts
• Nikkei up 0.97% Europe lower -0.73%
• Oil at $84.50/bbl
• Gold at $1678/oz.

Overnight Eco

• AUD Employment Change (SEP) 20.4K vs. 10.1K
• AUD Unemployment Rate (SEP) 5.2% vs. 5.3%
• JPY Tertiary Industry Index (MoM) (AUG) -0.2% vs. -0.3%
• CHF Producer & Import Prices (MoM) (SEP) -0.1% vs. 0.2%
• EUR German Consumer Price Index (MoM) (SEP F) 0.1% vs. 0.1%
• GBP Visible Trade Balance (Pounds) (AUG) -7.8B vs. 8.8B

Event Risk on Tap

• USD Trade Balance (AUG) expected at -$46.0B
• USD Initial Jobless Claims (OCT 7) expected at 409K
• USD Continuing Claims (OCT 1)

Price Action

• USD/JPY holds loses 77.00 on risk selloff
• AUD/USD rally at 1.0200 fizzles as risk sold off
• GBP/USD below 1.5700 despite better trade data
• EUR/USD drops through 1.3750 on fresh credit concerns

Gloomy comments by Deutsche Bank CEO Josef Ackermann sent risk FX tumbling in morning European trade reversing the Asian session rally. Mr. Ackermann warned that haircut of EU sovereign debt combined with demands to boost bank capital could lead to a credit crunch in the real economy.

"A question remains over whether banks will be able to provide financing, or whether possible haircuts in the euro zone and the new regulatory environment will practically force them to be restrictive," he told a conference of corporate executives gathered in Berlin. Mr. Ackermann’s remarks underlined the fragility of the European banking system which remains highly vulnerable to further stress in the region’s sovereign debt markets. They also provided and  excuse for some profit taking after several very strong days of gains  in risk FX.

Earlier, high beta currencies were boosted by better than expected Australian  employment figures which printed at 20.4K versus 10.1K eyed. the country’s unemployment also dipped to 5.2% versus 5.3% eyed.  This was the best job reading in four months, suggesting that the economy Down Under remains robust despite concerns over global contraction in growth. Nevertheless,  as many analysts have pointed out, the pace  of job growth in Australia has slowed markedly this year with the economy only generating 40K new jobs year to date versus 281K new jobs in 2010. Still today’s news should remove any expectations of  an RBA rate cut before the end of this year as the central bank will likely remain in a neutral mode as it continue to monitor global demand.   

However,  on a less positive note Chinese trade balance narrowed in September to $14.6B from 17.8B the month prior and 17.1B eyed. Exports slowed considerably rising only 17.1% versus 24.5% in August while imports also missed their mark increasing 20.3% versus 30.2% in August. The data shows a clear slowdown in global demand but the key question forward is whether this is just a hiccup or the start of a more ominous secular trend as we approach 2012. 

The simmering conflict between China and US regarding the passage of currency manipulation bill in the Senate has not helped matters. PBOC has guided USD/CNY higher for the second day in a row in a clear defiance of the Senate action, and although almost no one expects the bill to become law, increasing tensions between the  two economic superpowers may begin to weigh on investor sentiment if the situation escalates.     

In North American session today the eco calendar carries only the Trade Balance data and jobless claims numbers.  The market anticipates a slight deterioration in both readings, but if the data surprises to the upside it may provide a small lift to USD/JPY which yesterday staged a breakout above the 77.00 figure on rising US yields. Today the pair has drifted back below the 77.00 level as risk off flows send EUR/JPY tumbling. However, if jobless numbers print below the key 400K barrier, US yields may rise again as fears of a double dip recession continue to fade into the horizon and the pair could make another attempt at scaling the 77.00 handle as the day proceeds.  

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Comments (1)

traderwillie

October 13, 2011 at 09:36 AM ET

I'm looking to short the aussie some more below 1.0125.

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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.