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Euro Rebounds On Short Covering

Last updated 12/9/2011 5:35 AM ET (GMT -5) 4 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• EU Summit so far - no treaty changes ESM will not be a bank
• UK Trade Balance improves best on record
• Nikkei -1.48% Europe up 0.44%
• Oil slips to $97/bbl
• Gold at $1715/oz.

Overnight Eco

• JPY Gross Domestic Product (QoQ) (3Q F) 1.4% vs. 1.3%
• JPY BSI Large Manufacturing (QoQ) (4Q) -6.1 vs. 11.4
• EUR German Consumer Price Index (MoM) (NOV F) 0.0%
• EUR German Trade Balance (euros) (OCT) 12.6B vs. 14.5B
• GBP Producer Price Index Input n.s.a. (MoM) (NOV) 0.1% vs. 0.3%
• GBP Producer Price Index Output n.s.a. (MoM) (NOV) 0.2% vs. 0.2%
• GBP Visible Trade Balance (Pounds) (OCT) -7.5B vs. -9.5B

Event Risk on Tap

• USD Trade Balance (OCT) expected at -$44.0B
• USD U. of Michigan Confidence (DEC P) expected at 63
• CAD International Merchandise Trade (Canadian dollar) (OCT)
• CAD Labor Productivity (QoQ) (3Q)

Price Action

• USD/JPY holds above 77.50
• AUD/USD risk off rives it below 1.0100
• GBP/USD holds at 1.5600 on better data
• EUR/USD EU summit disappointment sends it to 1.3300 but rebound takes it above 1.3350

The European leaders agreed to a fiscal compact but failed to secure changes to the EU treaty over the strenuous objections of UK at the EU summit today causing disappointed investors to sell the EUR/USD in Asian and early European trade, but the pair found support at the 1.3300 level and stabilized ahead of the North American open.  Policymakers agreed to push for intergovernmental accord that will apply the 17 members of the EZ and will subject them to stricter budget overview procedures by the European commission. The text of the accord  will be drafted by March of 2012 and is not expected to require referendum approval. 

Although European authorities moved closer to fiscal integration the pace of change was gradual and far less than what the market wanted. Amongst some of the shortfalls, the EZ officials decided to cap the ESM  at 500 Billion euros and refused to turn the facility into a bank. As we noted earlier,” The EU summit has a created a more  structured framework to resolve fiscal issues in the union but provided absolutely no concrete solutions to dealing with massive financing problems  facing several key member nations. The yields on both Italian and Spanish sovereign bonds rose in the aftermath of the release as both nations face large refinancing rolls next year at markedly higher interest rates.”   

Despite the disappointment, the EUR/USD decline was relatively contained as the pair bounced off the 1.3300 level to trade at 1.3350 in mid-morning European trade. The lack of follow through reflects the skewed short positioning in the pair as well as mildly supportive environment in the equity market which rallied into the mid-morning European trade.

On the economic front the news out of UK was mildly positive with Trade Balance deficit registering  its biggest contraction on record as it shark to -7.6B GBP from -10.2B GBP the period prior while PPI output eased further in November to 5.4% from a peak of 6.3% in September. The news helped to push cable to 1.5650 from 1.5600 at the start of the session.

In North America today the calendar carries Trade Balance and U of M consumer confidence data, but the focus will remain on Europe and it will be interesting to see if US traders will extend the short covering rally in the EUR/USD or reverse it. For now there is disconnect between the credit and FX market reaction the event with credit instrument continuing to weaken in reaction to the meeting while FX rallies. Such disparity is generally unsustainable and  is usually resolved in the direction of the credit market.   

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Comments (4)

John Booke

December 09, 2011 at 06:37 AM ET

Are u saying the FX/Credit market disconnect is related to "short covering" or is it a result of "stop/loss" or option strike price levels being protected? I'm a bit confused on this one.

bschlossberg

December 09, 2011 at 06:48 AM ET

Neither. All I was saying was that FX was going one way and credit the other. Since then the news that China is putting an investment fund together has made this point moot anyway

John Booke

December 09, 2011 at 06:59 AM ET

OK thanx Boris.

Darkdoji

December 09, 2011 at 08:19 AM ET

"For now there is disconnect between the credit and FX market reaction the event with credit instrument continuing to weaken in reaction to the meeting while FX rallies. Such disparity is generally unsustainable and is usually resolved in the direction of the credit market."

- this sort of tip is incredibly useful for in-trade management and decision making. Do keep them coming whether this plays out or not. This is the edge you have over the rest of us who know far less than you do about how the market works. This is one good reason why we read you - especially in a crazy phase like this - still I am yet to lose a cent despite the ups and downs. Thanks though.

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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.