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Euro Hits 18 Month Lows as Financing Worries Weigh

Last updated 1/5/2012 5:52 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• EUR/USD under pressure as bank recap, auction pressures weigh
• UK PMI Services better
• Nikkei off -0.83% Europe -0.23%
• Oil at $102/bbl
• Gold continues to recover at $1607/oz.

Overnight Eco

• AUD AiG Performance of Service Index (DEC) 49.0 vs. 47.7
• AUD Trade Balance (Australian dollar) (NOV) 1.38B vs. 2.00B
• EUR German Retail Sales (MoM) (NOV) -0.9% vs. 0.2%
• GBP PMI Services (DEC) 54 vs. 51.5

Event Risk on Tap

• USD ADP Employment Change (DEC) expected at 180K
• USD Initial Jobless Claims (DEC 31) expected at 375K
• USD Continuing Claims (DEC 24)
• USD ISM Non-Manf. Composite (DEC) expected at 53
• CAD Industrial Product Price (MoM) (NOV)
• CAD Ivey Purchasing Managers Index (Dec)

Price Action

• USD/JPY holds above 77.50
• AUD/USD risk off pressures send it below 1.0300
• GBP/USD better data helps offset risk aversion flows as it holds below 5600
• EUR/USD pressured on worries over bank recap as 1.2900 gives way

Another night of selling pressure for the EUR/USD as the single currency continues to be plagued by sovereign debt and bank recapitalization concerns. The euro slipped to a fresh multi-month lows at 1.2835 in the wake of lackluster French bond auction and rumors that a major German institution may be in need of further financing. Meanwhile the Italian banking giant Unicredit saw its shares slide for the second day in a row as the declined by more than 10% before being suspended for trading.

France was able to auction off 8 Billion euros of long date bonds at yields of 3.97% versus 3.94% the month prior but saw its bid to cover ratio plunge to 1.64 versus 3.05 in December as investor appetite for even the core European debt remains muted. The allotment was at the upper end of the range but missed it maximum target and reaction in the currency market followed that of yesterday’s German auction as traders were unimpressed selling the unit in the aftermath of the results.

Although many market commentators continue to believe that the EUR/USD will stabilize and bounce given the overwhelming skew in positioning to the short side, this week’s price action suggests that strong downward pressures remain in place as fears over the massive re-financing needs in the region dominate currency trade at the exclusion of all other factors. If risk aversion accelerate in to the North American open today the pair could target the key 1.2800 level as the day progresses.

In UK the PMI Services report surprised to the upside much like the PMI Manufacturing and PMI Construction data earlier the in the week.  UK PMI Services printed at 54.0 versus 51.6 expected, rose to a five month high on the strength of new orders. The data should contribute to growth in services of about 0.4% in Q4 of 2011 and offset some of the weakness in manufacturing and construction during the same period. Looking forward however, business expectations were considerably weaker slipping to their lowest level in more than 2 years as UK firms worried about the impact of EZ sovereign debt crisis on future demand. Cable initially spiked on the news but then drifted lower breaking below the 1.5550 level as the overall risk aversion flows and the dour forward indicators in the PMI report trumped the beat on the headline level.

Looking to North America, the busy US economic calendar  will likely set the directional tone for the rest of the day. The docket carried ADP employment report at 13:15 GMT and the ISM Non-Manufacturing data at 15:00 GMT. Given the recent spate of positive US data the expectations are that both reports will beat the forecast. Analysts anticipate a print of 176K from ADP (vs. 206K last) and 53.0 on ISM (vs. 52.0 last). However, if the data print just in line or softer than projected risk aversion flows could quickly accelerate as market sentiment remains shaky and any disappointment is likely to trigger further sell off in risk assets with EUR/USD vulnerable to a test of 1.2800.        

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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.