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Top Stories

• BTP Bonds continue to sink after LCH raises margins Euro hit
• UK Trade deficit worst on record
• Nikkei up 1.15% Europe off -1.65%
• Oil at $96/bbl
• Gold at $1783/oz.

Overnight Eco

• AUD Westpac Consumer Confidence (NOV) 6.3% vs. 0.4%
• JPY Eco Watchers Survey: Current (OCT) 45.9 vs. 46.7
• GBP Visible Trade Balance (Pounds) (SEP) -9.8B vs. -8.0 B

Event Risk on Tap

• CAD New Housing Price Index (MoM) (SEP)

Price Action

• USD/JPY rallies to 77.75
• AUD/USD risk weighs as 1.0250 gives way
• GBP/USD Trade deficit pushies it to 1.6000
• EUR/USD back to 1.3700 on Italian credit woes

Italian credit market woes continued to weigh on the EUR/USD in early European trade as price on the benchmark 10 year BTP dropped below 86 and yields rose above the 7.0% level after LCH Clearnet raised margins on the instrument. The spread between the Italian and Germans bonds has widened to a euro era high once again prompting action from the clearing house. The news caused a stampede of selling  in the BTPs and with ECB initially absent from the market, support was nowhere to be seen triggering a sloppy selloff at the start of European trade. 

Thus, less than 24 hours after Prime Minister Silvio Berlusconi announced his resignation the relief rally in EUR/USD has faded as focus returns to the troubled Italian credit markets. The single currency is now almost directly correlated  with the 10 year Italian bond which has just hit the critical 7% yield level. Unless ECB provides some aggressive support to the market the shorts will continue to press their trades and that dynamic will weigh on the EUR/USD. Yesterday’s events in Rome were strictly political in nature and will not produce the immediate economic reforms that the market seeks. At best such policy moves will  take several months to establish. Therefore the ECB must act as a stabilizing force before the Italian credit problem becomes unmanageable.

Meanwhile on the economic front the UK Trade deficit widened to its largest gap on record as the data printed at -9.8B versus consensus call of -8.0B. The news suggests that UK Q4 GDP will contract and is further supported by the gloomy data from the Business Confidence Monitor index which slipped to -9.7 from 8.1 in Q3. The BCM reported weakness in all sectors and regions with London showing a notable loss of confidence suggesting that that the key finance sector starting to slow down. Cable dropped to 1.6000 in the aftermath of the  report and may continue to drift lower ahead of the BOE meeting this week which could signal another round of quantitative easing.

The North American calendar is once again barren today with only Chairman Bernanke’s speech on Small Business on the docket. The trading flow in the currency market will continue to be driven by the price action in European credit. If Italian bonds fail to stabilize and situation turns into a full blown panic liquidation the drop in the EUR/USD will accelerate with the pair eyeing 1.3600 as the day proceeds.     

FX Upcoming

Currency	GMT	EST	Release	Expected	Prior
CAD	12:30	8:30	New Housing Price Index (MoM) (SEP)		0.1%

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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.