Euro Rally Withers as Risk Aversion Returns

Last updated 2/20/2009 6:02 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• European stocks hit a 5 year low
• Stanford served with paper by FBI
• Trichet - Ireland is not a weak link
• Oil at $38/bbl after yesterdays rally
• Gold at $980/oz holding firm

Overnight Eco

• JPY All Industries Activity -2.7% as expected
• EUR French CPI bit hotter at -0.4% against -0.5% eyed
• EUR French Flash Manufacturing PMI 35.4
• EUR French Flash Services PMI 40.1
• EUR German Flash Manufacturing PMI 32.2 in line
• EUR German Flash Services PMI 41.6 worse than 45.0 forecast
• EUR Flash Manufacturing PMI 33.6 vs. 35.0 no signs of improvement
• EUR Flash Services PMI 38.9 against 42.6 as deterioration continues
• GBP Retail Sales better at 0.7% against 0.0%

Event Risk on Tap

• CAD CPI expected at -0.3%
• USD CPI expected at 0.2%

Price Action

• USD/JPY slips below 9400 as equity sell off drags
• AUD/USD drips all teh way to 6350 as riak aversion drives it lower
• GBP/USD holds up well in aftermath of better retails sales 1.4300 in view if risk appetite improves
• EUR/USD gives us yesterday's gain back to 1.2600 as risk aversion and woeful PMI readings weigh

The EUR/USD gave up much of yesterday’s gains in Asian and early European trade as risk aversion and woeful PMI flash readings kept the unit under pressure for most of the night. UK data on the other hand registered another upside surprise keeping pound within reach of the 1.4300 figure.

With Asian indices down and European stocks hitting five year lows risk aversion was back in play in the currency market, unwinding much of yesterday’s rally in the EUR/USD. As we recently noted “ As to the euro, we believe there is little cause for optimism just yet and any rally here is likely to be wither out.” Sure enough today’s flash reading of EZ PMI data proved woeful with PMI Manufacturing printing at 33.6 versus calls of 35 and PMI Services component slipping into the 30 handle at 38.9 versus 42.6 eyed.

The EZ region shows no signs of any meaningful coordination to address the growing credit problems of Eastern Europe, as well as the ballooning debt issues amongst some of its own member nations and this lack of resolve likely weigh on the unit as we move forward. Although today’s comments by President Trichet dismissed the notion that Ireland is the weak link the European Union, the fact remains that the highly overleveraged Irish economy is a ticking time bomb and would have surely succumbed the fate of Iceland were it not under the EZ umbrella. The policy maker’s dilemma is exacerbated by the latest economic evidence that demand in the region shows no signs of a rebound. With PMI readings hitting new lows, unemployment is likely to rise in the coming months, putting yet more political pressure on what is quickly becoming a very fragile union.

There were however, signs of rebound in UK where Retail sales printed a much better than expected 0.7% vs. expectations of no gain and the month’s prior reading was revised upward to 1.6%. As we write earlier, “This is yet another data point on the UK economic calendar that surprised to the upside signaling that the economy – which has been devastated by the collapse of global capital markets - may be bottoming out and could be the first of the G7 nations to stage a rebound. We have noted this positive trend in the micro economic data for the past several weeks, stating that should the UK news continue to be surprise to the upside sterling will rally against the euro. The EUR/GBP cross remains our favorite way to express cable’s relative strength and should UK economic data prove better than consensus a move to 8500 is likely over next several weeks.”

Turning to North America, the calendar carries only US CPI data, which in most likelihood will print hotter given yesterday’s PPI readings With equity markets in the doldrums the dollar continues to attract the safe haven bid, but even if risk appetite should return we doubt that EUR/USD could sustain much of a rally. The most interesting currency in the market these days is gold which is within a whisker of the $1000/oz level indicating that tehse days the market is skeptical about all fiat paper.

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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.