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Top Stories

• Enthusiasm fades as EUR/USD drops back to 1.3700
• IT Bond auction key test of stability today
• Nikkei up 1.05% Europe up 0.32%
• Oil at $98/bbl
• Gold steady at $1783/oz.

Overnight Eco

• JPY Gross Domestic Product (QoQ) (3Q P) 1.1% vs. 1.5%
• JPY Industrial Production (MoM) (SEP F) -3.3% vs. -3.8%
• NZD Retail Sales Ex Inflation (QoQ) (3Q) 2.2% vs. 0.6%
• CHF Producer & Import Prices (MoM) (OCT) -.2% VS. -0.3%
• EUR Euro-Zone Industrial Production s.a. (MoM) (SEP) n/a

Event Risk on Tap

Price Action

• USD/JPY drifts towards key 77.00 area
• AUD/USD rally fizzles as 1.0250 tested
• GBP/USD drops to 1.6000
• EUR/USD tests 1.3700 support as enthusiasm fades

Euro popped at the start of the Asian open rising to a high of 1.3800 after Italy and Greece saw a change of leadership over the weekend welcoming the more technocratic governments of Lucas Papandremous and Mario Monti. Currency markets were hope fullful that Mr. Papandremous and Mr. Monti would begin to institute proper budgetary reforms to pacify the credit markets. However, any type of fiscal reforms are likely to take some time to put in place and may face very stiff opposition from populations that are already suffering from serious economic hardship and the EUR/USD quickly lost steam as initial enthusiasm faded taking the pair below 1.3700 in mid morning European dealing .

Most analysts believe that given the chaos in the region the only solution lies with the ECB. The latest idea in the market is that the ECB sould announce explicit ceilings on peripheral debt yields (say 200bp premium for Italian BTPs to German bunds) that would effectively put an end to further deterioration in credit prices allowing the governments of those countries to refinance their debt at reasonable rates for the foreseeable future.  Having seen the recent success of the SNB at keeping the exchange rate of the EUR/CHF  above the 1.2000 mark  for more than two months, many market analysts believe that similarly explicit intervention tactics by the ECB  would put an end to the daily short selling assaults on EZ periphery bonds.

However, the rhetoric from the ECB officials at the start of the week suggested just the opposite course of action. ECB Governing council member Klaas Knot said that the recent ECB support for Italy was temporary, warning that if the Italian government does not institute reform that support will be withdrawn. Jens Weidmann, another ECB Council memeber, further undercut the rally in the EUR/USD& nbsp;by stating that the ECB will not be the lender of last resort in the Eurozone.  

Although Italian bond yields have declined markedly to 6.35% from the high of 7.5% posted last week, the reluctance of EZ officials to act with resolve suggests that the region’s credit markets will remain turbulent and will continue to be a source of volatility for FX. Today the focus in Europe will be on the 5 year BTP auction, but the modest amount of 3 Billion euros is unlikely to provide any solid information on the true demand in the market. The EUR/USD therefore is likely to remain rangebound with a negative bias and may test the 1.3650 level as the day progresses if US equity markets provide no support to risk flows.

Meanwhile, while the primary focus in FX remains on the EUR/USD, USD/JPY has been slowly drifting lower as it dipped below the 77.00 figure in overnight trade.  The BOJ therefore stands in danger of seeing its intervention efforts unravel once again as short slowly press their trades. If Japanese officials do not provide further support for the market and do not offer a specific target level for USD/JPY the pair  is likely to drift lower as the week progresses with shorts eyeing a retest of the key 75.00 support.  

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.