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Euro Drops to 1.3700 as Risk Under Assault From All Angles

Last updated 11/1/2011 6:16 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• RBA cuts rate as expected to 4.5%
• UK PMI Drops at fastest pace in 2 year Q3 GDP better
• Nikkei -1.70% Europe -3.14%
• Oil at $91.44/bbl
• Gold at $1711/oz.

Overnight Eco

• AUD AiG Performance of Manufacturing Index (OCT) 47.4 vs. 42.3
• JPY Labor Cash Earnings (YoY) (SEP) 0.0% vs. -0.3%
• CHF SVME-Purchasing Managers Index (OCT) 46.9 vs. 47.8
• GBP Gross Domestic Product (QoQ) (3Q A) 0.5% vs. 0.3%
• GBP Purchasing Manager Index Manufacturing (OCT) 47.4 vs. 50

Event Risk on Tap

• USD ISM Manufacturing (OCT) expected at 52.2
• USD Construction Spending (MoM) (SEP) expected at 0.3%

Price Action

• USD/JPY holds above 78.00
• AUD/USD sells off to 1.0350 post RBA
• GBP/USD weak PMI data weighs as 1.5950 broken
• EUR/USD hits 1.3700 in risk sell off

Risk aversion dominated currency trade in Asian and early European session today as a plethora of issues weighed on investor’s minds. The news was bad on every front with economic data missing expectations, monetary policy becoming more accommodative and event risk raising the prospect of uncertainty. EUR/USD dropped below the 1.3700 level before finally finding some bids while Aussie drifted to 1.0350.

Economic data from both Asia and Europe confirmed that global growth was slowing as Chinese PMI printed at 50.4 versus 51.9 eyed. This was the worst reading in more than 2 years and came perilously close to slipping below the key 50 boom/bust line. Meanwhile in UK PMI Manufacturing did fall into contractionary territory as it printed at 47.7 versus 50.0 forecast. This was fastest pace of decline in 2 years suggesting that economic activity in the manufacturing sector is slowing markedly.

Although the UK GDP data for Q3 came in better than expected at 0.5% versus 0.3% projected, the markets ignored the news as backward looking and focused instead on the depressingly weak PMI numbers. Manufacturing comprises only a small portion of UK GDP, but if Thursday’s PMI Services report confirms the dour trend cable could see further selling in the week ahead. As of tonight it broke below the key 1.600 support  level and was drifting towards 1.5900 ahead of the North American open.

In Australia, the RBA as expected lowered its benchmark rate by 25bp to 4.5%   noting that, “recent information is consistent with a moderation in the pace of global growth, though fears of a major downturn have not been borne out so far. “The move to a more neutral posture should be a welcome sign to the country’s    retail and housing sectors. Housing prices have dropped for 3 consecutive quarters amidst slowing demand and decline in consumer confidence. Today’s action will likely result in lower service costs for  many Australian homeowners where the majority of mortgages are variable rate.  the news could provide a small boost to growth going into the key Christmas season.     

As we noted earlier, “The Aussie remains the predominant carry trade currency in the G-20 universe, but with today’s action the RBA has clearly reversed course on interest rate policy going forward. Given its massive interest rate differential versus the other majors, the Aussie will continue to remain closely tied to risk appetite for the foreseeable future, but it may lose some of its luster if RBA lowers rates further into the end of the year and beyond. “

In North America today focus turns to ISM Manufacturing with market expecting a 52.1 reading versus 51.6 the period prior. If the data confirms forecast it could provide the first positive piece of news for the day and set the stage for some rebound in the risk trade. However, if the ISM numbers misses it could turn investor sentiment even more negative as traders begin doubt the economic revival scenario into the year end. With EUR/USD now more than 500 points off its post-EFSF deal high the unwind has been swift and brutal and may accelerate as markets once again lose faith in the recovery story.   

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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.