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Euro Rallies Despite Lack of Progress on Policy Front

Last updated 11/28/2011 4:25 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• IMF loan story to Italy denied but risk rallies nevertheless
• Global equity markets boosted by US Black Friday Sales
• Nikkei up 1.56% Europe up 1.51%
• Oil at $98.85/bbl
• Gold at $1709/oz.

Overnight Eco

• NZD Business Confidence (Nov) 18.3 vs. 13.2
• EUR Germany CPI -0.1% vs. 0.1% (Nov)
• GBP CBI Realized Sales (Oct) n/a

Event Risk on Tap

• USD New Home Sales (MoM) (Oct)

Price Action

• USD/JPY rallies to 77.75 staying quiet
• AUD/USD risk rally sends it more than 100 points higher to .9885
• GBP/USD rallies to 1.5530 on risk flows
• EUR/USD rallies above 1.300 despite denial of IMF report

High beta currencies spiked higher on the first trading day of the week initially boosted by a report in Italian newspaper La Stampa that the IMF was working on a 600 Billion euro loan to Italy. The report was later denied by an IMF spokesman but risk currencies held on to their gains nevertheless as global equity markets remained bid on news of strong Black Friday sales in the US.

Risk FX clearly appears to be sold out for the time being as negative sentiment reached its peak at the end of last week and despite the absence of any concrete policy actions on the part of EZ officials the short covering squeeze could continue into the North American session especially if equities sustain their rally. The denial by the IMF officials of a loan to Italy as well as denial by German officials to issue common bonds backed by the credit of 6 AAA rated EZ members, shows that policymakers remain at a loss for viable solution to resolve the region’s credit crisis.  Yet they have no choice but to produce a cohesive plan relatively soon.

As we noted earlier, “Italy will need to rollover 300 Billion euro of sovereign debt in 2012 which at current market rates of 7% will likely prove unmanageable for it to service.” That in turn means that “Ultimately the EZ will require much greater integration of its fiscal policies and an issuance of Eurobonds if it is to stop the short running attacks against the weaker credits in the region.”

On the economic front the calendar is light today with only German CPI data and EZ Money supply figures on the docket. On the inflation front the figures showed further declines in price levels in most German states suggesting that ECB has room to cut its benchmark rates without affecting price stability. The EZ economy is clearly facing a major slowdown and may in fact be in danger of slipping into deflation so further accommodative monetary action   will be necessary if there is no pickup in activity in Q1 of 2012.

In North American session today the only data point is the New Home Sales expected to print at 313K versus 313K the month prior. Traders however will focus on digesting the better than expected Black Friday figures as well as reacting to the latest reports on Cyber Monday activity. US has become the surprising bright spot on global economic stage and if North American equity markets extend the gain from Asia and Europe the rally in risk FX could see further gains with EUR/USD targeting 1.3400 as the day proceeds despite any meaningful progress from policymakers to resolve the credit crisis in the region.

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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.