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Risk FX Rallies as EZ Credit Spreads Compress

Last updated 12/5/2011 5:19 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Speculation of CB to IMF deals propels EURUSD higher
• UK PMI Services beats to upside
• Nikkei up 0.60% Europe up 0.99%
• Oil At $101.62/bbl
• Gold hovers near $1750/oz.

Overnight Eco

• AUD AiG Performance of Service Index (NOV) 47.4 vs. 48.4
• AUD ANZ Job Advertisements (MoM) (NOV) 0.0% vs. 0.6%
• EUR Euro-Zone Sentix Investor Confidence (DEC) -24.0 vs. -21.4
• EUR Euro-Zone Purchasing Manager Index Services (NOV F) 47.5 vs. 47.8
• GBP Purchasing Manager Index Services (NOV) 52.1 vs. 50.7

Event Risk on Tap

• USD ISM Non-Manufacturing Composite (NOV) expected at 53.5
• USD Factory Orders (OCT) expected at 0.0%

Price Action

• USD/JPY quiet near 78.00
• AUD/USD rallies to 1.0250 on better risk
• GBP/USD capped at 1.5650 despite better data
• EUR/USD rallies to 1.3450 on CB to IMF speculation

Much more constructive tone in the currency market as we start  the week’s trade with high beta FX rallying on speculation of possible new financing scheme for trouble EZ sovereign credit involving central banks and the IMF. A story in German newspaper Die Welt suggested that the Fed along with 17 central banks from Europe would create a lending consortium  that would provide the IMF a “triple-digit billion” loan that would be used for a special fund to help finance troubled credits in the Eurozone region. US Secretary of Treasury Timothy Geithner will be in Europe this week to presumably discuss the details of such a proposal with European fiscal and monetary officials.  

As we noted earlier, “It appears that authorities  across both side of the Atlantic are coming to the conclusion that the central banks to IMF scheme is  the most expeditious policy response to the growing credit crisis in the EZ region as it neatly sidesteps many political barriers by  providing much needed capital without the need for legislative approval. 

However, the central banks-to-IMF plan is rife with problems. The IMF is simply not big enough to provide sustained financing to the Eurozone and the organization's members from the developing world may object to so much aid going to the coffers of developed nations. In short, the IMF financing scheme may turn out to be yet another stop gap measure and is unlikely to pacify European credit markets for long.”

Nevertheless, for now the markets are responding positively to the news with Italian BTPs especially showing great improvement at the 2 year yield dipped to 5.8% from nearly 8% just a few weeks ago. The easing of stress in the EZ credit markets  should continue to underpin  the EUR/USD for the time being but traders will want to see some further progress on fiscal unification as the week progresses if the rally in the pair is to remain sustainable.

Meanwhile data on the economic front continued to deteriorate with EZ Final PMI Services reading printing at 47.5 while the Sentix investor confidence data came in at -24.0 vs. -21.4 eyed. Retails Sales however printed a tad better than forecast at -0.4% versus -0.8% projected but continued to contract. It is clear that economic growth in the EZ is dangerously close to contraction as the fallout from the sovereign debt crisis takes its toll on the real economy which makes this week’s series of meeting even more important as markets look to policymakers for action.

In North America today the focus turns to the ISM Non-Manufacturing  report with analysts expecting a slightly better read of 53.6 versus 52.9. The data may be a bit anti-climactic coming after Friday’s NFP report, but may still pack a punch in the market as it will provide traders with the latest gauge of activity in the services sector. If the data beats to the upside it should help the rally in risk extend its gains and push EUR/USD towards a test of the 1.3500 level as the day progresses.   

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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.