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Risk FX Soars on Short Covering Rally

Last updated 1/17/2012 5:49 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Chinese data better helping to fuel risk on rally
• ZEW survey blows past forecasts
• Nikkei up 1.05% Europe up 1.76%
• Oil just above $100/bbl
• Gold at $1663/oz.

Overnight Eco

• JPY Tertiary Industry Index (MoM) (NOV) -0.8% vs. -0.3%
• NZD NZIER Business Opinion Survey (4Q) 0 vs. 25
• EUR Euro-Zone Consumer Price Index (MoM) (DEC) 2.7% vs. 2.8%
• EUR German ZEW Survey (Economic Sentiment) (JAN) -21.6 vs. -53.8
• EUR German ZEW Survey (Current Situation) (JAN) 28.4 vs. 26.8
• GBP Consumer Price Index (MoM) (DEC) 3.0% vs. 3.0%
• GBP Retail Price Index (MoM) (DEC) 4.8% vs. 4.7%

Event Risk on Tap

• USD NY Empire State Manufacturing Index (Jan)

Price Action

• USD/JPY drifts back 76.50
• AUD/USD risk rally takes it up 1.0440
• GBP/USD quiet at 1.5370
• EUR/USD short covering squeeze on better Chinese data takes it towards 1.2800

Risk FX saw a massive short covering rally in Asian and early European trade today as better than expected data from China and Germany boosted investor confidence pushing EUR/USD higher by nearly 150 points off its session lows. Chinese data beat across the board with GDP expanding at 8.9% versus 8.7% forecast, Industrial Production rising by 12.8% versus 12.3% eyed and Retail Sales increasing by 18.1% versus 17.2% projected.

Although China’s economy grew at its weakest pace in two and a half years, the news nevertheless allayed fears of a hard landing that would have proven to be a major drag on global growth. Today’s data showed that while net exports subtracted from 2011 growth consumption contributed more than half the increase as China tries to rebalance its economy from relying solely on export growth and more towards domestic demand.

Analysts remain concerned that the ongoing turmoil in Europe which is China’s top export market will continue to weigh growth in H1 of 2012, with some anticipating that the country’s GDP could slip below the key 8% level. For now however, the data shows that the decline in demand is not nearly as severe as feared suggesting that China will continue to contribute to global growth, lessening the chance of any significant  slowdown in G-20 GDP.

Meanwhile in Germany the ZEW survey posted a huge improvement printing at -21.6 versus -49 eyed suggesting that investors in the region are becoming convinced that the worst may be over with respect to the credit markets. This was the biggest jump in a month and according to the ZEW institute points to stabilization of the economy within the next 6 months.

If China can indeed engineer a soft landing while Europe manages to avoid a recession the much maligned euro may stage a surprise rally as the worst of the bearish predictions fail to materialize. As we noted earlier, “The news provided much needed relief to a grossly oversold euro which has been battered by S&P downgrades of France on Friday and EFSF yesterday. The latest COT showed that euro shorts have reached record highs, leaving the pair highly vulnerable to a short covering rally as the skew in positioning begins to correct itself. The pair has taken out the 1.2750 barrier in early European trade and if risk flows prove positive into the North American open it could target the 1.2800 figure as late shorts scramble for cover.”   

In North America the calendar carries Empire Manufacturing as well as the latest BOC announcement. The market anticipates no change of course from the BOC, but will look carefully at the tone of the statement trying to ascertain central bank's assessment of Canadian economic prospects in H1 of this year. With equities poised for a large bounce after a holiday weekend the key question for the day will be whether the rally in risk is sustainable. We believe it will be unless there are further negative news out of Europe. If the macro environment remains quiet, risk FX should extend its rally as the day proceeds.   

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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.