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Euro Extends Rally on Strong Spanish Auction

Last updated 1/19/2012 5:18 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Australian employment misses
• Euro remains capped at 1.2900
• Nikkei 1.04% Europe up 0.53%
• Oil at $101.50/bbl
• Gold at $1667/oz.

Overnight Eco

• AUD Employment Change (DEC) -29.3K vs. 10.2K
• AUD Unemployment Rate (DEC) 5.3% vs. 5.2%

Event Risk on Tap

• USD Consumer Price Index (MoM) (DEC)
• USD Consumer Price Index Ex Food & Energy (MoM) (DEC)
• USD Housing Starts (MoM) (DEC)
• USD Building Permits (MoM) (DEC)
• USD Initial Jobless Claims (JAN 14)
• USD Continuing Claims (JAN 7)
• USD Philadelphia Fed. (JAN)

Price Action

• USD/JPY quiet at 76.75
• AUD/USD weak employment sends it below 1.0400
• GBP/USD ralyy capped at 1.5450
• EUR/USD runs to take out the 1.2900 level stymied so far

Strong results from the Spanish 10 year bond auction and positive risk sentiment during European trade helped push the EUR/USD through the 1.2900 level as the short squeeze in the currency pair continued for the third day in row.  Spain sold a total 6.6 billion euros of bonds nearly twice the 3.5 billion target as demand for its paper proved strong.

Most notably Spain saw a good bid to cover ratio for its long date bonds due 2022 as it increased to 2.2 versus 1.5 the period prior. The better than expected uptake in the Spanish bonds and the improvement in the bid to cover ratio suggests that European credit markets are beginning to thaw as investors grow more comfortable with the periphery European sovereign debt. The latest announcements that the IMF may increase its capital base to 1 Trillion euro and the expected increase in LTRO borrowing of up to 1 Trillion euros at the next month ECB tender offer have provided a massive pool of liquidity for the regions credit markets helping to offset the recent spate of downgrades by the ratings agencies.

Against this background the euro has stabilized and has staged a short covering rally as selling pressure on the pair eases amidst better credit market conditions. As we have noted repeatedly the EUR/USD  is grossly oversold on a positioning basis and therefore ripe for a short covering rally on any sign of positive news. The move up has been slow and hesitant with shorts trying to stymie every rally but if the pair manages to clear the 1.2900 level with conviction it will open a way for the run towards the key 1.3000  level where many longer term stops are placed.

In other news  Australian employment missed its mark printing at -29.3K versus forecast of 10.2K sending Aussie lower in Asian session trade. The unemployment rate decreased to 5.2% from 5.3% expected as the participation rate declined to 65.2%. However, the internals of the labor report were not nearly as gloomy as the headline number would suggest with the vast loss in jobs coming from the part-time sector. Full time jobs actually increased by 24K indicating that  employment demand remains relatively robust despite the recent slowdown in Australian economy. Overall employment growth has been nearly flat in 2011 - the worst performance since 1992.

As a result of today’s data,  interest rate markets have priced in an 88% probability that the RBA will lower rates  once again at its next meeting in February, but Australian policy makers may choose to remain stationary given the mixed signals from the labor report. Nevertheless, the news dragged the Aussie lower, with the pair trading 50 points off its highs in lackluster Asian session. If risk appetite picks up into European and North American dealing, the Aussie may recover the 1.0400 level but it is likely to underperform the rest of the high beta currencies as the disappointment from the labor report will weigh on it for the rest of the day.  

In North America today the calendar carries Philly Fed, CPI and housing data along with the jobless claims numbers. Last week the jobless number climbed back dangerously close to the 400K level dampening investor optimism over the recovery of the US labor market. This week the market is anticipating an improvement to 387K. If the jobless data meets or beats the consensus estimates it should help risk flows as the day proceeds and could extend the rally in the EUR/USD. If on the other hand the number prints close to 400K or worse the rally in risk could come to  a dead stop as markets begin to fear the prospect of slowdown in US economic recovery and EUR/USD could retrace all of its overnight gains.     

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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.