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Euro Hits a Wall As Dollar Demand Rises in Swap Facility

Last updated 12/7/2011 6:02 AM ET (GMT -5) 0 Comments - Add your comment

Overnight Eco

AUD Gross Domestic Product (QoQ) (3Q) 1.0% vs. 1.0%
AUD AiG Performance of Construction Index (NOV) 39.6 vs. 34.6
JPY Leading Index (OCT P) 91.5% vs 91.8%
CHF Unemployment Rate (NOV) 3.0% vs. 3.1%
EUR German Industrial Production s.a. (MoM) (OCT) n/a
GBP Manufacturing Production (MoM) (OCT) -0.7% vs. -0.1%
GBP Industrial Production (MoM) (OCT) ).7% vs. -0.3%
GBP NIESR Gross Domestic Product Estimate (NOV) n/a

Event Risk on Tap

USD Consumer Credit (OCT) expected at $7.0B

Price Action

USD/JPY very slow trade as further drift towards 77.50
AUD/USD higher to 1.0300 on better GDP and risk but sells a bit in Europe
GBP/USD weak IP/MP data has no impact as it reads water at 1.5600
EUR/USD 1.3450 caps and bit of sell off on higher that expected Swap demand

Risk FX was slightly bid but remained in essentially a holding pattern in Asian and early European trades as currency markets awaited the ECB meeting and EU summit scheduled for tomorrow. The EUR/USD ran to take out the 1.3450 level in pre-European trading but backed off those levels after the ECB revealed that dollar demand via its swap auction came in at 50 Billion versus expectation of 20-40 Billion suggesting that the banking sector in the region continues to experience funding difficulties. In contrast the BOE saw no bids and the SNB only saw 75M demand for its swap facility.

The news unwound most of the rally in the pair and pushed it below the 1.3400 figure by mid-morning European trade as credit issue remain front and center focus of the credit market. For the time being traders are giving the benefit of doubt to policymakers, in hope that they will be able to produce a comprehensive plan for fiscal integration at this Thursday’s EU summit.

The pair is also being helped by the skew in positioning with CFTC data revealing that euro shorts have risen to their highest level in 18 months. However, given the tenuous conditions in the EU financial sector, if tomorrow’s summit disappoints the pair could tumble to test its recent lows near 1.3200 irrespective of imbalances in positioning.

The news from Australia was markedly better with the country recording a strong rise in Q3 GDP of 1% and 2.5% year on year growth overall. This was the second consecutive robust quarter of growth as business investment increased by a whopping 13% led by engineering firms. On the consumer front, however, the gains were more modest with household final consumption rising only by 1.2% but up by 3.8% from a year ago.

Yesterday the RBA lowered its benchmark interest rate by 25bp to 4.25% in a preemptive attempt to maintain growth in the Australian economy as faces slowing demand from Asia. However, today’s strong GDP data suggests that the Australian monetary authorities may now wait for several months before easing any further as the country’s economy continues to put in some of the best performance in G-20.

In North America today the calendar is barren and trading is likely to be rangebound as US traders keep their eye on the other side of the Atlantic. The EUR/USD remains in a broad 1.3350-1.3500 range ahead of the summit and barring any more headline risk those levels should hold for the rest of the day.

FX Upcoming

Currency	GMT	EST	Release	Expected	Prior
USD	20:00	15:00	Consumer Credit (OCT)	$7.0B	$7.4B

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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.

Euro Hits a Wall As Dollar Demand Rises in Swap Facility

Boris Schlossberg

Director of Currency Research, GFT