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Once Again Credit Spreads Weigh on The Euro

Last updated 11/15/2011 5:18 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• German GDP in line, ZEW misses, Periphery spreads widen out again
• UK CPI bit cooler than forecast but core remains high
• Nikkei off -0.72% Europe -0.68%
• Oil at $98/bbl
• Gold at $1770/oz.

Overnight Eco

• EUR German Gross Domestic Product s.a. (QoQ) (3Q P) 0.5% vs. 0.5%
• EUR Euro-Zone Gross Domestic Product s.a. (QoQ) (3Q A) 0.2% vs. 0.2%
• EUR German ZEW Survey (Current Situation) (NOV) -59.1 vs. -52.7
• GBP Consumer Price Index (MoM) (OCT) 5.0% vs. 5.1%
• GBP Retail Price Index (MoM) (OCT) 5.4% vs. 5.5%

Event Risk on Tap

• USD Advance Retail Sales (OCT) expected at 0.2%
• USD Producer Price Index (MoM) (OCT) expected at -0.2%
• USD Retail Sales Less Autos (OCT) expected at 0.2%
• USD Empire Manufacturing (NOV) expected at -4

Price Action

• USD/JPY spikes to 77.40 but fades back to 77.00
• AUD/USD drifts towards 1.01050
• GBP/USD below 1.5900 after rally higher fails
• EUR/USD below 1.3600 as French spreads widen to record

Risk FX continued to slide lower in early European trade as bonds spreads widened to record highs signaling that the credit market markets in the region remain in a state of stress. The spread between Italian and German bunds reached a euro level high of 600bp while the differential between French and German bonds expanded to 173bp. France is now at risk of becoming the next target of bond vigilantes and the continuing deterioration in the EZ credit markets suggests that authorities are unable to pacify the markets with their current efforts.

As we noted yesterday the markets were looking for a serious level of financial support from EZ monetary and fiscal officials, but instead were treated to the same old rhetoric on the need for austerity measures and budgetary reform. As a result the selling frenzy in the EZ credit markets persists weighing on all risk assets as investor confidence in the region remains fragile.

On the economic front German Q3 GDP data printed in line at 0.5% versus 0.5% as strong labor market performance finally had a positive impact on consumption helping to lift growth in Europe’s largest economy. Production activity picked up markedly in the July through September period  helping to fuel expansion in Q3, however as we noted earlier, “currency markets are much more concerned about the prospect of growth into the year end, as many analysts fear that German economy may have stalled to the point of contraction due to the burgeoning credit crisis in the region  and slowdown in global demand.”

The ZEW survey printed weaker than forecast coming in at -55.2 versus -51.8 eyed. This was the worst reading since October of 2008 as credit crisis concerns weighed heavily on investor sentiment. The reading suggests that Germany is at risk of a contraction in Q1 of 2012 as the turmoil in the financial markets begins to spill over into the real economy.  

In UK the CPI data printed cooler than expected at 5.0% versus 5.1% eyed as supermarket price wars drove down the inflation gauge. Despite the lower than forecast headline number core CPI rose to 3.4% from 3.3% projected. Overall the data was generally in line and is unlikely to have any material impact on BOE inflation report due Wednesday with the central bank n o doubt arguing that price pressures will continue to moderate going forward. Cable sold off to 1.5850 on broad risk aversion flows and may test the 1.5800 barrier as the day proceeds if investor sentiment remains negative.

In US today the focus turns to Retail Sales with markets anticipating a pullback to 0.3% from 1.1% the month prior. In addition the traders will also get a glimpse of the PPI data and the latest Empire Manufacturing reading which is expected to improve to -2.0 from -8.5 the month prior.  Unless US data produces a major surprise it is unlikely to have any meaningful impact on FX trade as focus remains firmly on the other side of the Atlantic. The EUR/USD looks ready to test support at 1.3500 is risk aversion flows accelerate into the North American open. 

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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.