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Risk FX Treads Water While USD/JPY pressured below 77.50

Last updated 12/8/2011 5:13 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Currencies mark time ahead of EU summit
• AUD employment much worse than forecast
• Nikkei of 0.66% Europe up 0.61%
• Oil at $100/bbl
• Gold at $1742/oz.

Overnight Eco

• AUD Employment Change (NOV) -6.3K vs. 10K
• AUD Unemployment Rate (NOV) 5.3% vs. 5.2%
• JPY Machine Orders (MoM) (OCT) 0.0% vs. 1.6%
• JPY Current Account Total (Yen) (OCT) 0.52T vs. 0.54T
• JPY Eco Watchers Survey: Current (NOV) 45 vs. 47.1
• EUR French NFP 0.0% vs. 0.2%

Event Risk on Tap

• USD Initial Jobless Claims (DEC 2)
• USD Continuing Claims (NOV 25)
• USD Wholesale Inventories (OCT) expected at 0.3%
• CAD Housing Starts (NOV)

Price Action

• USD/JPY slips below 77.50 as risk appetite declines
• AUD/USD weak labor data keeps it below 1.03
• GBP/USD steady at 1.5700
• EUR/USD treads water at 1.3400

Currencies were quiet in Asian and early European trade as markets awaited the ECB meeting and the EU summit results with EUR/USD essentially treading water around the 1.3400 mark. Commentary from various EZ officials had very little impact on trade, including statements by French minister for European affairs Jean Leonetti who said that the “euro could unravel” if the crisis was not resolved.

There appears to be little concrete knowledge as to the policy proposals that EZ authorities will make. Yesterday the market once again heard rumors of a possible 600B lending facility from the IMF, but they were quickly denied suggesting that the IMF may not want to assume such a central role in the management of the EZ credit crisis. 

With so many scenarios circulating on the wires, the FX market may be experiencing headline fatigue as every new policy idea sees less and less price action. It appears that policymakers continue to disagree on many points of fiscal integration and a result  the summit proclamation may underwhelm the market and could send EUR/USD to test its recent swing lows at the 1.3200 level.

While most of the majors remained quiet, USD/JPY came under renewed pressure with the pair slipping below the key 77.50 level in mid-morning European trade. The pair is slowly but surely unwinding its recent gains as outlook on global growth in 2012 begins to darken. The pair has seen a small rally from 76.00 on assumption that US growth would pick up in H2 of 2012, but the disappointing ISM services data along with the creeping realization that the EZ crisis could have chilling effect on global demand is putting fresh downward pressure on USD/JPY as investors temper their expectations. 

On the economic front, Australian employment disappointed the market printing at -6.3K versus 10K eyed. The unemployment rate increased to 5.3% from 5.2% the month prior as it remained above the 5% level for the fifth month in a row. The data was particularly shocking as 40K full time jobs were lost suggesting that the labor market conditions may be worse than initially thought. Although analysts were quick to point out that the latest labor data reflected reticence on the part of employers to make new hires rather than the much troubling trend of massive layoffs, tonight’s employment news could weigh heavily on the Aussie if it forces the RBA to accelerate its easing program in order to revive the labor market.

The pair initially tumbled to 1.0240 on the news but has since made a strong and surprising recovery to 1.0295 despite lack of any support from equity flows. Although the Aussie has shown remarkable resistance we continue to believe that the pair is vulnerable to further sell offs, especially if EU summit proves to be a  disappointment and triggers fresh round of risk aversion in the market.

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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.