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Rally In Stocks Helps Lifts Euro Through 1.2800

Last updated 1/10/2012 5:28 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Chinese Trade grows at slowest pace in 2 years
• French IP up by 1.1%
• Nikkei 0.38% Europe up 1.96%
• Oil at $102/bbl
• Gold at $1625/oz.

Overnight Eco

• AUD Building Approvals (MoM) (NOV) 8.4% vs. 6.6%
• GBP RICS House Price Balance (DEC) -16 vs. -18

Event Risk on Tap

• USD Wholesale Inventories (NOV) expected at 0.4%
• CAD Housing Starts (DEC)

Price Action

• USD/JPY very quiet under 77.00
• AUD/USD rallies to 1.0300 on better housing data risk flows
• GBP/USD capped at 1.5500 post positive RICS
• EUR/USD tumbles to 1.2750 on Irish worries but rebounds to 1.2800

The euro tumbled from its highs at the start of European trade on concerns over a possible second bailout of Ireland, but recovered to trade back to the 1.2800 figure as positive risk sentiment carried high beta FX higher. Earlier, the single currency was pressured by the story in the Irish Times which quoted Citibank economist William Butler stating that the Emerald Isle needs a second bailout   to reduce its debt service costs. Mr. Butler was quoted as saying that, “the most attractive option from Ireland’s point of view would be a reduction on the interest it pays on an outstanding €30 billion in promissory notes, issued mostly to deal with the collapse of Anglo Irish Bank.” He said Ireland is paying in the region of 6 per cent on this money but it could be refinanced at 3 per cent by the European Financial Stability Facility.    

As we noted earlier, “Although Ireland has been touted as a poster child for sound economic recovery after it instituted draconian budget deficit reforms and returned back to growth, the latest data from the country suggests that it may be sliding back into a recession. Yesterday Ireland reported that Consumer confidence slid to 49.2 from 60.1 the month prior - its largest decline since 2001 - while   expectations for the next 12 months dropped to 32.4, the lowest level since January 2011.  A renegotiation of its interest rate costs would go a long way towards alleviating some of the financial burden the government faces and may temper any political impulse to secede from the EZ if the economic situation deteriorates.”

The euro however was able to shrug off the latest sovereign debt fears as risk appetite remained positive in European session lifting equities by more than 1.5%. The economic calendar was very sparse but carried a few upside surprises to help the bullish mood. In Australia Building approvals printed considerably higher at 8.4% versus 6.6% indicating that demand for housing remains robust, while in UK the housing also improved with RICS recording a reading of -16 versus -18 eyed.  Chinese Trade Balance was also better than expected despite the fact that exports slowed slightly as imports declined by nearly a half from the month prior. The news sparked speculation that Chinese monetary authorities may ease lending conditions further which was seen as positive for risk assets.

With little eco data on the calendar for the rest of the day, trading in the currency market is likely to be driven by equity flows. Stocks have bolted from their blocks as the year began registering gains every day so far. If equities in North American session can extend the rally form overnight risk FX should follow with AUD/USD eyeing the recent highs near 1.0390 while EUR/USD targets 1.2900. As we noted yesterday, the short euro trade remains extremely crowded and the pair is vulnerable to a short covering squeeze, barring no further exogenous shocks from the European credit markets.

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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.