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EUR/USD Rallies to 1.3100 as IFO Surprises to the Upside

Last updated 12/20/2011 6:11 AM ET (GMT -5) 1 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• German IFO beats taking risk higher
• Spanish auction markedly better boosting risk as well
• Nikkei up 0.49% Europe up 0.85%
• Oil at $95/bbl
• Gold at $1607/oz.

Overnight Eco

• CHF Trade Balance (Swiss franc) (NOV) 3.00B vs. 2.47B
• EUR German PPI (MoM) (NOV) 0.1% vs. 0.1%
• EUR German IFO - Business Climate (DEC) 107.2 vs. 106.2
• EUR German IFO - Current Assessment (DEC) 116.7 vs. 116
• EUR German IFO - Expectation (DEC) 98.4 vs. 97.0

Event Risk on Tap

• USD Housing Starts (MoM) (NOV) expected at -0.2%
• USD Building Permits (MoM) (NOV) expected at -1.4%
• CAD Consumer Price Index MoM (NOV)
• CAD Bank Canada CPI Core MoM (NOV)

Price Action

• USD/JPY trades below 78.00 again
• AUD/USD back up to parity on better risk flows and less dovish RBA
• GBP/USD breaks out to 1.5640
• EUR/USD targets 1.3100 post better than forecast IFO

Risk currencies rallied in early European trade today boosted by unexpectedly better than forecast results from the latest German IFO survey and strong Spanish T- Bill auction that saw markedly lower yields. The EUR/USD rose to a high of 1.3084 and Aussie rallied back to parity as positive investor sentiment continued to build throughout the night.

The IFO survey printed at 107.2 versus 106.3 forecast its best reading in four months, as German business sentiment defied the gloom and doom surrounding the EZ economy indicating that business conditions remain robust. The  news was positive across the board with Current Assessment and  Future Expectations readings also beating forecasts. The better than expected German IFO result is only the latest upside economic surprise from the region. The Citigroup Economic Index Surprise Index shows that the region is about to cross over the 0 barrier from a low of -100 in September of this year. The better than expected economic data in conjunction with the sharp skew in positioning to the short side, bodes well for a possible short covering rally in the EUR/USD into the year end.

The single currency could also see some help from the improving EZ credit market as evidenced by today’s strong Spanish T- bill auction. Spain was able to auction off 3 and 6 month T-bills at rates markedly lower than the period prior. Spain sold 1.92B  euros  of  6 month T-bills at bid to cover ratio of  4.1 vs. 4.9 with an average yield of 2.435% vs. 5.227% previously. It also sold 3 month T-bills at an average yield of 1.735% vs. 5.110% previously. The reduction in rates was dramatic and if it holds into the new year it could ease the financing burdens of Club Med economies considerably and possibly avoid a recession in the region.

Elsewhere, the RBA minutes also proved positive for risk with Australian monetary authorities signaling that after two consecutive rate cuts they were likely to remain stationary for the time being. As we noted earlier, “The news caught the market slightly off guard with few traders anticipating that the RBA would be so sanguine about the state of the Australian economy. If Australian interest rates remain steady at 4.25% for the next several months the Aussie will continue to enjoy a massive interest rate differential versus the other majors and as such will remain the preeminent risk trade in the currency market.”     

In North America today the calendar is quiet once again with only housing data on tap. The market is looking for no change and the report in unlikely to have much of an impact on trade. The key to further rally in risk will lie with US equity traders. If US stocks extend the rally on the assumption that European economic situation may be better than originally thought, EUR/USD could retake the 1.3100 figure as the day progresses

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Comments (1)

traderwillie

December 20, 2011 at 02:38 PM ET

Nice piece, Boris. Thank you for the update. The rise in the euro is a bit overdue after it's long extension downward. However, I think we'll get one more plunge down to threaten the yearly lows, before a rise into the end of the year as positions square up. But we made a nice 1% return on the euro rise with the aussie break out. Merry Christmas!
Bill Jenkins
www.thefxtradingmasters.com

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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.