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Euro Gives Up Early Gains, Yen Remains Near Record Strength

Last updated 10/24/2011 5:25 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• French services PMI hits 26 month low, German data mixed
• EU Summit negotiations continue with 100B agreement on recap of banks
• Nikkei up 1.90% Europe up 0.485
• Oil at $88/bbl
• Gold at $1651/oz.

Overnight Eco

• AUD Producer Price Index (QoQ) (3Q) ).6% vs. 0.8%
• JPY Merchandise Trade Balance Total (Yen) (SEP) -0.02T vs. -0.11T
• EUR German Purchasing Manager Index Manufacturing (OCT A) 48.9 vs. 50.0
• EUR German Purchasing Manager Index Services (OCT A) 52.1 vs. 49.8
• EUR Euro-Zone Purchasing Manager Index Manufacturing (OCT A) 47.3 vs. 48.1
• EUR Euro-Zone Purchasing Manager Index Services (OCT A) 47.2 vs. 48.6
• EUR Euro-Zone Industrial New Orders s.a. (MoM) (AUG) n/a

Event Risk on Tap

Price Action

• USD/JPY continues to drift towards 76.00 despite Japanese warnings
• AUD/USD just below 1.0400 as risk suports
• GBP/USD rises to 1.600 but sells off at that level
• EUR/USD back below 1.3950 after weak PMIs

Another topsy turvy session for the EUR/USD at the start of week’s trading as the pair first rallied on renewed confidence regarding the EU summit and better Chinese PMI data only to give up its gains in early European dealing after EZ PMI data revealed further deterioration in economic activity.  The pair rose to a high of 1.3954 in the wake of Chinese PMI data that rebounded to 51.1 from 49.9 the period prior, suggesting that world’s second largest economy is not facing any risk of hard landing.  

The news from Europe however was not nearly as sanguine with PMI data from the region dropping to fresh two year lows as services reading declined to 47.2 versus 48.6 eyed and the manufacturing gauge dropped to 47.3 versus 48.1 forecast. The news suggests that the 17 member union now faces heightened risk of recession as the troubles in the financial sector are clearly having a negative impact on the real economy. Those risks could escalate quickly if the fiscal officials in the region are not able to come up with a comprehensive solution to the sovereign debt crisis that is now metastasizing from the periphery towards the core.

Over the weekend, officials  appear to have arrived at some broad agreements on the plan to recapitalize the banks, but have yet come to terms on the issue of haircuts for Greek debt or the size of the EFSF fund. As we wrote earlier, “For the time being EUR/USD holds its bid hold its bid on hopes that the EU summit will provide a comprehensive resolution to the financial crisis in the region resulting in rebound in growth by the end of the year. If however, sentiment sours as little progress is made, the EUR/USD will become much more vulnerable to a steeper selloff as hope for stabilization fades and the reality of negative growth in the EZ begins to set it.”

Meanwhile the yen continued to strengthen in the wake of dovish rhetoric from Fed Vice Chairman Janet Yellen who noted on Friday that QE3 may be warranted. “Securities purchases across a wide spectrum of maturities might become appropriate if evolving economic conditions called for significantly greater monetary accommodation,” Ms. Yellen said in prepared comments to the annual meeting of the Financial Management Association International.  The statement has continued to weigh on USD/JPY with the pair approaching the 76.00 figure once again after setting a post war low on Friday. The downward drift was occurring despite persistent warnings from Japanese officials.

Finance Minister Jun Azumi told reporters that the yen's move Friday was "an absolutely speculative movement and did not reflect economic fundamentals at all. If this becomes excessive, we must take decisive step in the currency market." We believe that Japanese authorities will not tolerate further appreciation of the yen below the key 75.00 level and irrespective of their poor record in the past, will intervene in the currency markets in order to ease the burden on the country’s vital export sector.

With no economic data on the North American docket the latest development from Brussels will likely be the key driver of trade, but unless markets see some significant progress in negotiations  the negative data from overnight is likely to weigh on sentiment and the pair could unwind back to 1.3800 as the day proceeds.

FX Upcoming

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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.