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Euro Rebound Depends on BTP Yields

Last updated 11/10/2011 6:10 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Euro Rebounds as BTP yields drop below 7%
• Chinese Trade Data misses
• Nikkei -2.91% Europe up 1.86%
• Oil at $96.82/bbl
• Gold off by 20 at $1770/oz.

Overnight Eco

• AUD Employment Change (OCT) 10.1K vs. 10.1K
• AUD Unemployment Rate (OCT) 5.2% vs. 5.3%
• JPY Consumer Confidence (OCT) 38.6 vs. 39.3
• EUR German Consumer Price Index (MoM) (OCT F) 0.0%
• EUR German Wholesale Price Index (MoM) (OCT) -1.0% vs. 0.2%

Event Risk on Tap

• USD Trade Balance (SEP)
• USD Initial Jobless Claims (NOV 4)
• USD Continuing Claims (OCT 28)
• CAD International Merchandise Trade (Canadian dollar) (SEP)

Price Action

• USD/JPY slides to 77.60
• AUD/USD drops to 1.0060 before rebounding back to 1.0130
• GBP/USD steady at 1.5930
• EUR/USD tests 1.3500 before bouncing to 1.3600

Risk currencies stabilized in early European trade after the yield on the benchmark Italian 10 year bond eased back below the key 7% level on reputed ECB buying. EUR/USD which fell below the psychologically important 1.3500 level in late Asian session, staged a furious rebound rising to a high of 1.3635  before running out of momentum.

The rise in the euro was also helped by better than expected results from the auction of 1 year Italian Treasury bills which came in at 6.08%. Although the results beat forecasts, this was nearly twice the rate that Italy paid at its prior auction and highlights the severity of the  credit problems facing the country. The biggest problem for Italy may not be the issue of funding, but rather the parabolic increase in debt services costs that it faces next year. As we noted earlier, “Italy is the world’s fourth largest issuer of debt and faces more than 300 Billion in refinancing in 2012 which could add nearly 11 Billion EUR in additional interest rate expense for the country’s Treasury.“

Meanwhile economic data from Europe   continued to disappoint with French Industrial Production  sinking by -1.7% in September from August as significant drop in construction, electronic equipment and energy production all contributed to  the worst contraction in demand in more than 2 years. The news only confirmed the ongoing economic slowdown in the region which makes it that much more challenging for EZ  officials to  deal with the spreading credit crisis.

In Asia Chinese Trade Balance also missed its mark printing at 17.0B versus 26.3B eyed. Exports rose by 15.9% which was markedly less that the 17.1% rise in September. The data clearly shows that growth in China is slowing as we near the year end and therefore it will not be able to act as an offset to the contraction in the Eurozone. The news is likely to weigh on the AUD/USD and the pair could test the key parity level before the end of the week as concerns over global growth lead to speculation of further rate cuts from the RBA.

In North America today the calendar carries the Trade Balance data and the weekly jobless claims. The weekly jobless numbers could set the tone in early trade especially if they pop above the key 400K barrier once again. With little eco data to move the market the focus will likely remain on Italian bonds. If rate begin to tick above the 7% mark the rebound in the EUR/USD will unwind quickly and the pair will try to retest the 1.3500 support as the day proceeds.  

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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.