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Euro Rallies on Short Covering, Swiss Franc Sold As Secrecy Laws May Crumble

Last updated 2/19/2009 5:53 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Equities mildly bid accross the board
• UBS settles with US givernmnet but press conference at 1400ZH on future secrecy laws will be key to CHF
• Europe may have to help with Ukraine debt rollover - Barroso
• Oil at $35/bbl
• Gold at $970/oz on a bit of profit taking

Overnight Eco

• AUD New Motor Vehicle Sales -1.1% versus 1.7% last
• JPY Rate Decision no change 10bp
• CHF Trade Balance better at 2.03B vs. .62B forecast
• GBP Public Sector Net Borrowing -3.3B versu 16.5B last as sovereign obligations rise
• Prelim M4 Money Supply 2.5% vs. 1.2% forecast
• CHF ZEW Economic Expectations better at -57.5

Event Risk on Tap

• CAD Leading Index expected at -0.6%
• USD PPI expected at 0.2%
• USD Unemployment Claims
• USD Philly Fed Manufacturing Index expected at -24.1
• CB Leading Index expected at 0.0%

Price Action

• USD/JPY very quiet pivoting around 9350 as BOJ decision has no effect
• AUD/USD improves materially as traders favor Austrailan economy on relative basis
• GBP/USD trades all teh way to 1.4400 but borrowing data blunts the rally
• EUR/USD breaks through 1.2600 as bargain hunters return

Dollar steadily lost ground during the Asian and early European sessions today as bargain hunting and short covering helped drive both the euro and pound higher.  After coming close, but failing to take out the psychologically important 1.2500 level yesterday, EUR/USD catapulted higher on a buy recommendation by US investment bank that cited excessive bearishness in the EZ and the Eastern European economies.

 Cable meanwhile was propelled higher on the crosses, first through a large EUR/GBP sell order on the open of London trade which took the pairing to 8775 and then later on massive GBP/CHF buying. Today UBS settled with the US government and avoided prosecution regarding the illegal shelter of taxable funds. The Swiss government has scheduled a press conference at 1400 ZH to discuss the matter in more detail and more importantly to qualify the new policy regarding the country’s vaunted secrecy laws. The fear that the Swiss will now have to become much more compliant with the rest of the G7 world with respect to reporting of client funds  has weighed heavily on the franc today as traders grow increasingly concerned about the possibility of capital flight from the country’s banking sector.

The economic calendar continues to be extraordinarily quiet, but the latest release of UK Public sector funding data put frowns on the faces of pound bulls. UK reported a slight deficit of -3.3B GBP for January – a period during which the government typically runs substantial surpluses. For example,  the previous month recorded a net positive figure of 16.5 Billion GBP suggesting that the combination of markedly lower tax revenue and substantially higher government outlays is likely to create a massive deficit hole in the UK budget as the year progresses.  The  news put an abrupt halt to  the cable  rally after it hit the 1.4400 figure.

 As to the euro, we believe there is little cause for optimism just yet and any rally here is likely to be wither out. The situation in Eastern Europe remains precarious and could worsen as debt obligations come due. The EZ will almost certainly need to arrange some sort of an extension to the debt repayment schedule putting further stress on the regions banking system. Meanwhile, growth prospects for the EZ economy remain gloomy and tomorrow ‘s PMI data is likely to register new lows.

Turning to North America, the US calendar has PPI on the docket which is likely to print a bit hotter after dramatic falls last month, with crude now settled down in the $35/bbl region. Both the weekly jobless claims and the Philly Fed numbers are likely to disappoint, but the question today will be whether equity traders will shrug off the news and continue to buy stocks in the wake of the passage of the Obama stimulus package and the administration’s efforts on foreclosure mitigation.   USD/JPY has traded to 9400 and may now target yearly high at 94.62 if risk continues to thrive.

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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.