Euro and Pound Go Separate Ways

Last updated 4/1/2009 5:48 AM ET (GMT -5) 0 Comments - Add your comment

Forex Trading involves high risks, with the potential for substantial losses and is not suitable for all persons. Past performance is not necessarily indicative of future results.

Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• TANKAN hits the lowest reading on record
• Chinese PMI declines in March
• UK PMI prints best reading since October
• Equities mixed with Asia up but Europe down
• Oil $48.3/bbl
• Gold at $920/oz

Overnight Eco

• AUD AiG Performance of Mfg Index 33.4 vs. 31.7 last
• JPY Tankan Manufacturing Index -58 vs. -55
• JPY Tankan Non-Manufacturing Index -31 vs.-26
• AUD Building Approvals much better 7.8% vs. 1.5%
• AUD Retail Sales -2.0% vs. -0.5% called
• AUD Commodity Prices 7.6% vs. 12.6%
• EUR German Retail Sales -0.2% vs. 0.2%
• EUR Final Manufacturing PMI 33.9
• GBP Manufacturing PMI 39.1 much better than 34.9 projected

Event Risk on Tap

• USD Challenger Job Cuts
• USD ADP Non-Farm Employment Change expected at -647K
• USD ISM Manufacturing PMI expected at 35.4
• USD Pending Home Sales expected at -1.6%
• USD Construction Spending expected at -1.8%
• USD ISM Manufacturing Prices expected at 32.4

Price Action

• USD/JPY drops to 98.10 on Obama comments but trades back 99.00 as traders target 100
• AUD/USD comes back to 6900as risk recovers
• GBP/USD much better PMI helps to support run to 1.4400
• EUR/USD holds at 1.3200

As officials met for the G-20 meeting currencies were mixed with no overall theme defining trade today. In Japan the TANKAN report recorded its worst reading ever but the data had little impact on USD/JPY. Instead the pair reacted to a Bloomberg story that the Obama administration was considering bankruptcy for the auto companies which spurred a wave of risk aversion that dropped the USD/JPY more than 100 points in a matter of minutes. However, the pair spent the rest of the night crawling back to 9900 with many traders now targeting the psychologically important 100 level for a stop run.

As we noted earlier “Ironically enough, investor optimism, which has been the key force behind the recent rise in USD/JPY& nbsp; may prove to be the best stimulant for Japan’s economy as well. Should USD/JPY recapture 100 and stay there for a significant amount of time, the improvement in Japanese corporate profitability will go a long way towards rectifying the current economic malaise. However, such hopes rest on a very shaky foundation as any evidence of stabilization much less any rebound in global demand remains non-existent for now. If investor enthusiasm fades dragging equity indices back to their lows, USD/JPY& nbsp; will once again return to the 9000 level and any hopes for Japanese economic recovery will vanish.”

Meanwhile data from EZ and UK went their separate ways with German Retail Sales contracting by -0.2% against expectations of 0.2% rise while UK PMI manufacturing bounced to 39.1 which was much better that the 34.9 projected. The gloomy German data was hardly surprising given the sharp rise in unemployment and only confirms market expectations of a 50bp cut from ECB this Thursday. The UK manufacturing report on teh oether hand was a welcome bit of news for pound bulls as the PMI gauge registered its best reading since last October.

The divergence in the data was reflected in EUR/GBP which slipped more than 100 points from its London open highs. With ECB rate hike on the plate tomorrow we expect the pressure on EUR/GBP to continue as the compression of interest rate differentials and the prospect of some form of quantitative easing from ECB should keep the euro on the back foot for the time being.

Turning to the North American session all eyes will be peeled on the ADP report due 12:15 GMT today. The market forecasts a small improvement of 643K but should the number surprise to the upside printing greater than 700K, risk aversion could return with a vengeance as investors anticipate further contraction of the US economy. Much of the recent rally in stocks has been predicated on the idea that Q1 of 2009 was the trough for the US economy. However, with the prospect of bankruptcy for GM and Chrysler looming on the horizon, the bearish argument that the worst is yet to come could be quickly gain ground especially if the labor data shows further deterioration.

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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.