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Top Stories

• Italian auction see yields drop but demand weak
• UK PPI turns negative for first time in 18 months
• Nikkei up 1.36% Europe up 1.04%
• Oil below $100/bbl on easing of tension in Iran
• Gold at $1644/oz.

Overnight Eco

• EUR Euro-Zone Trade Balance s.a. (euros) (NOV) 6.1B vs. 0.7B
• GBP Producer Price Index Input n.s.a. (MoM) (DEC) -0.6% vs. 0.0%
• GBP Producer Price Index Output n.s.a. (MoM) (DEC) -0.2% vs. 0.0%

Event Risk on Tap

• USD Trade Balance (NOV) expected at -$45.0B
• USD Import Price Index (MoM) (DEC) expected at -0.1%
• USD U. of Michigan Confidence (JAN P) expected at 70.3
• CAD International Merchandise Trade (Canadian dollar) (NOV)

Price Action

• USD/JPY drifting towards 76.60
• AUD/USD well bid all night as 1.0350 taken out
• GBP/USD squeeze to 1.5400 falters after weak PPI data
• EUR/USD Italian auction pushes it back to 1.2800

Weak demand for Italian 3 year bond auction sent EUR/USD tumbling off it session highs as the pair fell back to the 1.2800 figure in mid-morning European trade. Italy was able to auction off its full allotment of 4.75B of paper with yields dropping to 482% from 5.62% the period prior. However, the bid to cover ratio was a paltry 1.22 raising concerns amongst currency traders that next week’s 10 year bond auction may not attract enough interest.

The disappointing demand for the intermediate term BTPs took the wind out the sails for the EUR/USD which had rallied strongly ahead of the auction in late Asian trade, spiking to a high of 1.2880. The pair sold off by more than 100 points in the aftermath of the announcement as short term specs bailed out of the trade. However, despite the lackluster demand the marked decrease in yield should provide some relief  to the EZ credit markets and indeed the yield on the benchmark 10 year Italian bond remained lower  after the auction.

The EUR/USD remains oversold and continues to be vulnerable to further short squeezing rallies. Today’s Italian auction results may have been a temporary setback in the recovery of the pair, but if the credit markets continue to stabilize the euro could make another run at the session highs as the day progresses.

Meanwhile, UK Factory gate price declined more than expected in a December, contracting for the first time in more than  a year and half. UK PPI output printed at -0.2% versus 0.0% eyed. Input prices declined even further dropping by -0.6% versus 0.0% forecast. Excluding the volatile food and energy sectors, wholesale prices fell by -0.7%. This was the largest month over month fall in more than two years indicating that UK price pressures may finally start to ease in 2012. For the past several years the UK economy has been in the unenviable position of experiencing both slow growth and high inflation costs that has hampered fiscal and monetary officials alike.

Today’s subdued price data however, suggests that the BOE may now have the opportunity to expand its monetary policy further by increasing QE sometime in the near future as policymakers seek to stimulate the moribund economy. GBP/USD  had no reaction to the news as the pair traded in tandem with broader risk flows, spiking to 1.5400 in late Asian trade only to fall back to 1.5350 in profit taking during the London open. Going forward cable remains under pressure and today’s weak PPI data will only  weigh on the pair for the foreseeable future.

In North America today, the market will get a glimpse of the Trade data and more importantly the U of Michigan consumer sentiment report. Markets are anticipating a rise to 71.2 from 69.9. The data becomes critical in light of this week’s weaker than expected Retail Sales and sudden spike in jobless claims. If consumer sentiment does not improve the recovery rally in risk assets could come to a grinding halt.   

FX Upcoming

Currency	GMT	EST	Release	Expected	Prior
USD	13:30	8:30	Trade Balance (NOV)	-$45.0B	-$43.5B
USD	13:30	8:30	Import Price Index (MoM) (DEC)	-0.1%	0.7%
USD	14:55	9:55	U. of Michigan Confidence (JAN P)	70.3	69.9
CAD	13:30	8:30	International Merchandise Trade (Canadian dollar) (NOV)		-0.89B

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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.