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Euro Back Under Pressure as Week Starts

Last updated 11/7/2011 5:20 AM ET (GMT -5) 1 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Italian bond spreads hit euro era highs
• Swiss CPI very weak prompting fears of SNB intervention
• Nikkei down -0.39% Europe of -1.97%
• Oil at $93.73/bbl
• Gold at $1768/oz.

Overnight Eco

• AUD ANZ Job Advertisements (MoM) (OCT) -0.7% vs. -2.2%
• CHF Unemployment Rate (OCT) 3.0% vs. 3.0%
• CHF Consumer Price Index (MoM) (OCT) -0.1% vs. 0.2%
• EUR German Industrial Production s.a. (MoM) (SEP) n/a
• EUR Euro-Zone Retail Sales (MoM) (SEP) -0.7% vs. 0.1%

Event Risk on Tap

• USD Consumer Credit (SEP)

Price Action

• USD/JPY remains above 78.00 in quiet trade
• AUD/USD slips below 1.0300 on risk selloff
• GBP/USD hold 1.6000 on early London trade
• EUR/USD hovers near 1.3700 as Italian woes weigh

It was a choppy start to the week’s trade today as EUR/USD came under some early morning selling pressure after Italian government bond spreads reached their widest level since the beginning of the euro era. The yield on 10 year Italian BTP bonds increased above the key 6.50% level, last trading at 6.54% as markets now focus on the political turmoil in Italy. 

Italian Prime Minister Silvio Berlusconi has one day left to convince a group of party rebels from defecting from his coalition in order to survive a key Parliamentary  vote on public finance that could topple his government as early as Tuesday. Although Mr. Berlusconi assured his supporters  that he has enough votes to stay in power,  other politicians disagree. "Berlusconi is bluffing in a last desperate attempt to save himself. He no longer has a majority in the Chamber," said Dario Franceschini of the main opposition Democratic party. Analysts have estimated that Berlusconi could face as many as 20 to 40 potential defectors which would be more than enough to defeat the current government. 

Although a no confidence vote would on the surface only add to the political instability in Italy, the currency markets may actually cheer such an outcome given Mr. Berlusconi’s questionable reputation.  Having suffered an endless string of investigations into his personal and business behavior, Mr. Berlusconi has lost the confidence of most investors to lead Italy at a time of serious economic challenge and his departure from the political stage may be actually viewed favorably by most market participants. 

Meanwhile in Switzerland the CPI data printed markedly cooler than expected declining to -0.1% from 0.2% eyed. The news spread fresh fears into the market that the country may be facing more deflationary pressures due to the strength of the franc and spurred further speculation that the SNB will intervene to raise the EUR/CHF floor higher perhaps above the 1.2500 level. EUR/CHF spiked on the news and traded higher throughout the night approaching the 1.2400 barrier in mid morning European trade.

EZ Retail Sales  printed much worse than forecast at -0.7% vs . 0.1% eyed. The sharp decline was caused by slowing demand in France, Spain and Portugal     becoming the latest piece of evidence that the brewing credit crisis in the region in beginning to spill over into the real economy. Plagued by the highest unemployment rates since 1998 consumers are clearly retrenching  - trend that will make it that much more difficult for governments in the region to balance their budgets as tax revenues are likely to suffer.

The EUR/USD fell below the 1.3700 level in reaction to the news and may see further weakeness as the day progresses if EZ credit markets do not stabilize. 

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Comments (1)

KRISTOFA

November 07, 2011 at 06:57 AM ET

Really your analysis as it concerns the market is valuable. This will aid every
trader who want to trade the market fundamentally.
Thank you for your precise and continious contributions.
OKENTA KRISTOFA

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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.