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Better Chinese Data Fuels Short Covering Rally in EUR/USD

Last updated 1/17/2012 2:44 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Better than expected economic data out of China helped spur a rally in risk during Asia trade triggering a massive short squeeze in EUR/USD and AUD/USD with both currencies rising more than 100 points off their 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 net exports subtracted from 2011 growth while consumption contributed more than half 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.

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.  

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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.