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Euro Rides a Roller coaster of News

Last updated 1/18/2012 5:47 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Euro on roller coaster after Fitch threat of downgrade of Italy
• UK labor data mixed but claimant count lower
• Nikkei up 0.99% Europe flat
• Oil at $101/bbl
• Gold at $1652/oz.

Overnight Eco

• AUD Westpac Leading Index (MoM) (NOV) 2.4%vs.8.3%
• GBP Claimant Count Rate (DEC) 1.2K vs. 9.1K
• GBP Jobless Claims Change (DEC) 8.4% vs. 8.3%
• GBP Average Weekly Earnings 3M/YoY (NOV) 1.9% vs. 2.0%

Event Risk on Tap

• USD MBA Mortgage Applications (JAN 13)
• USD Producer Price Index (MoM) (DEC)
• USD Producer Price Index Ex Food & Energy (MoM) (DEC)
• USD Industrial Production (DEC)

Price Action

• USD/JPY ralies back to 76.75
• AUD/USD 1.0400 caps any rally for now
• GBP/USD bit better data helps keep it above 1.5350
• EUR/USD roller coaster ride with 1.2800 capping for now

The euro went on a roller coaster ride today rising in late Asian trade on optimism over a possible deal on the restructuring of Greek debt only to tumble when Fitch threatened a two notch downgrade of Italy only to return to the session highs by midmorning European trade on news that IMF may boost its lending facility by $1 Trillion.  

The euro was well bid in Asia rising to a high of 1.2800 on the back of expectations that private investors and Greek government were coming closer to an agreement on the haircuts for Greek sovereign debt. The Institute of International Finance, which represents banks involved in the proposed Greek debt swap, said Tuesday that negotiations should resume on Wednesday with “a sense of urgency.” As we noted earlier, “A restructuring of Greek debt  would provide some temporary relief for the EZ sovereign debt markets, although few analysts believe that the country will be able to avoid default in the long run given its massive debt of 130% of GDP. Nevertheless an agreement with private sector creditors would provide a boost to investor sentiment and push EUR/USD  higher.”

However, the pair was temporarily felled by a wire report that Fitch was considering a downgrade of Italian debt. According to Reuters a senior director from Fitch indicated that the ratings agency was preparing to lower the ratings on Europe’s third largest economy. The news killed the recovery rally in risk FX with EUR/USD quickly reversing its Asian session gains as the pair tumbled from 1.2805 to 1.2740 in a matter of minutes. 

An hour later the euro reversed course yet again on a newsflash that the IMF may expand its lending facility up to $1 Trillion as it was pushing its top contributors including China, Brazil and Japan to expand  the fund’s capital base in order to provide support for EZ credit markets.  As we wrote earlier, “The persistent threat of sovereign debt downgrades hangs over the Eurozone like the sword of Damocles yet each new announcement from the ratings agencies is having less and less impact on the market with most of the credit risks now priced in.”  Traders are now far more interested in the policy actions of the supra-national organizations such as the ECB or the IMF rather than the pronouncements of the ratings agencies, since it is those supra-nationals that are now acting as the lenders of last resort.

In other news UK employment data was mixed with ILO unemployment reaching a 17 year peak as the rate climbed to 8.4% from 8.3% eyed while average wage gains rose only 1.9% versus 2.0% forecast. However, the claimant count figures were better than expected at 1.2K versus 7K while the month’s prior figures were revised downward to 0.2K from 3K. The news was good enough to help propel the pound towards the 1,5400 figure but the price action remained subdued as attention in the market was focused elsewhere.

In North America today the calendar carries PPI, TICS and IP data – all of them second tier reports. The market looks for Industrial Production to improve to0.5% from -0.2% the month prior and if the data confirms the consensus call it may provide a small lift to risk assets helping to push the EUR/USD higher as the short squeeze in the pair continues to play out. 

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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.