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Can Positioning Help Lift EUR/USD to 1.4000?

Last updated 10/17/2011 5:28 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Risk on as Europe buoyed by US Retail data
• G-20 has little impact on FX trade as market awaits Oct. 23rd summit
• Nikkei up 1.50% Europe up 1.34%
• Oil at $88/bbl
• Gold at $1695/oz.

Overnight Eco

• JPY Industrial Production (MoM) (AUG F) 0.6% vs. 0.8%
• GBP Rightmove House Prices (MoM) (OCT) 2.8% vs. 0.7%

Event Risk on Tap

• USD Empire Manufacturing (OCT) expected at -4
• USD Industrial Production (SEP) expected at 0.2%

Price Action

• USD/JPY breaks towards 77.50
• AUD/USD rallies through 1.0350 on risk flows
• GBP/USD steday at 1.5800
• EUR/USD takes out 1.3900

Better risk flows at the start of European trade helped to lift EUR/USD through the key 1.3900 level as currency markets remained relatively buoyant on the first trading day of the week. With little reaction to the G-20 communiqué and with no meaningful economic data on the docket, currencies took their cue from equities which continued to rise in the wake of more signals that global economic growth may be rebounding into the year end. Friday’s better than expected US Retail Sales report was just the latest data point to surprise to the upside quelling investor concerns about any possible return to recession for the US economy.

Currency traders are taking  a wait and see attitude to the policymakers announcement that the Eurozone will "decisively address the current challenges through a comprehensive plan".  With G-20 over, the focus now  turns to the grand summit scheduled for October 23rd as markets await the resolution of three key issues  - 1). the new package on Greece including the extent of haircuts applied to Greek sovereign debt, 2). the recapitalization plans for EU banks ( with some sources reporting up to EUR200 Billion allocated to that task, while French officials stating that recapitalization must come from private funds, 3). The future state of the EFSF including the possibility of taking on leverage for the fund as well as assume a broader mandate in the capital markets. 

For now the details regarding these key points remain unanswered as EZ governments furiously negotiate in private ahead of the summit. Meanwhile the broader economic climate continues to support risk helping to propel the EUR/USD above 1.3900 while Aussie rises above the 1.0350 level.  One key factor that may be helping to fuel the rally is the fact that retail positioning in the euro remains net short. The latest COT report form CFTC shows that small speculators remained well short of the currency at more than 90K contracts versus 17K long reducing their exposure by only 9K.  That type of skew in positioning suggests that the shorts are vulnerable to a further squeeze with 1.4000 level the natural target of the longs that is likely to trip a large amount of stops.

In North American session today the market will get a glimpse of the Empire Manufacturing data as well as Industrial Production and Capacity Utilization reports. The market is looking for a slight improvement on all readings and if the data once again surprises to the upside it should provide an additional lift to risk flows. USD/JPY broke above the 77.00 level in late Friday trade on speculation that Japanese officials will attempt to weaken yen in order to stimulate exports. The pair continues to hold above the 77.00 figure in today’s session and if the US data proves positive it may  challenge 77.50 and possible 78.00 as the day proceeds and investors grow more confident in the prospects for US growth into the year end.

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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.