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EUR: Really Nice Short Squeeze

Last updated 1/12/2012 4:40 PM ET (GMT -5) 1 Comments

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• EUR: REALLY NICE SHORT SQUEEZE
• USD: WEAK RETAIL SALES POSE CHALLENGE TO RECOVERY
• GBP: WEAKER DATA SIGNALS MORE TROUBLE AHEAD
• CAD: HOUSE PRICE GROWTH ACCELERATES
• NZD: EMPLOYMENT CONFIDENCE DOWN
• AUD: OIL PRICES DECLINE, GOLD STEADY
• JPY: TRADE ACTIVITY WEAKENS MATERIALLY

EXPECTATIONS FOR UPCOMING FED MEETINGS

EUR: REALLY NICE SHORT SQUEEZE

The EUR/USD enjoyed a really nice short squeeze today courtesy of Mario Draghi. The President of the European Central Bank reassured the market that their decision to extend low interest loans was correct because it effectively brought stability to the credit markets. He started his press conference by saying there are “tentative signs of stabilization of economic activity” even though “substantial downside risks” remain.  Going into the monetary policy announcement, investors were looking for the central bank to keep rates unchanged, sound pessimistic and leave the door open to additional easing. Even though rates were left at 1.00 percent, Draghi was extremely non-committal about future policy. When asked if they were open to cut rates further, he said their decision depended on the inflation outlook which is currently balanced. With EUR/USD short positions at record highs, the lack of pessimism and mention of more stimulus by Mr. Draghi was enough to trigger a short squeeze in the EUR/USD. Unless there is surprisingly euro negative news flow over the next 24 hours, the short squeeze could continue for another 100-150 pips. However we still believe that the gains should remain limited to 1.3050 at best because even Draghi admits that the success of the 3 year LTRO loans does not automatically mean that investors are willing to assume longer term credit risk. Draghi’s reassuring words do little to remove the strong possibility of slower growth in 2012. European nations still have to implement austerity measures that will undoubtedly take a bite out of the economy in the coming year. Yet for the time being the EUR/USD is enjoying its strongest one-day rally since the beginning of December and this strong move should not be overlooked particularly since it coincides with the intraday reversal in U.S. equities. In terms of economic data, French consumer prices grew at a slightly faster rate in the month of December while Eurozone industrial production growth slowed. There is still quite a bit of unevenness in the Eurozone which is another reason why we are very skeptical of 1.2660 being the long term bottom in the EUR/USD.

USD: WEAK RETAIL SALES POSE CHALLENGE TO RECOVERY

Weaker than expected U.S. economic data drove the dollar lower against most the major currencies.   There have been recent improvements in the labor market and other parts of the economy, but unfortunately, a lower unemployment rate has not translated into stronger consumer spending, which is a major challenge for any country hoping for a stronger recovery.  We can now understand why Federal Reserve officials have eyed the recent improvements in the U.S. economy with skepticism. According to the latest retail sales figures, consumer spending rose a mere 0.1 percent in December, which is a worrying sign that heavy discounting and the holidays failed to drive enough consumers into the stores.  Excluding gas and autos, sales were even worse - experiencing zero growth in December. The biggest drop off in spending was on electronics and general merchandise but gas stations receipts were also revised higher just like the prior month's report because spending picked up the last two weeks of the year. Adding salt to the wound were jobless claims which ticked up to 399k from 375k, which is just within an inch of the psychologically significant 400k level.  If claims rise back above 400k, investors will start to worry about payroll growth falling sharply in the month of January.  However despite the disappointing retail sales report and the uptick in jobless claims, we still expect consumer confidence to improve as the holiday season and string of better U.S. data last week take the minds of consumers off the problems in the global economy. The University of Michigan is scheduled to release its January consumer confidence report and economists currently expect sentiment to rise to its highest level in 6 months. In addition, the U.S. trade balance and import prices are also due for release and the deficit is expected to rise while import prices are expected to fall. 

GBP: WEAKER DATA SIGNALS MORE TROUBLE AHEAD

The lack of action by the Bank of England kept the British pound steady against the U.S. dollar. However ECB President Draghi’s reassuring words about the Eurozone drove the euro sharply higher against the U.S. dollar AND British pound.  Action by the BoE was not expected and we will have to wait for the minutes to gain more clarity on whether the central bank shares the ECB’s optimism. According to recent economic reports, there are plenty of reasons for the Monetary Policy Committee to remain concerned about the outlook for the U.K. economy. Yesterday, we saw trade activity suffer from weaker external demand and this morning, we learned that industrial production fell 0.6 percent in November, which was much worse than the market’s 0.1 percent forecast. This is the second straight month that industrial production has slowed which is a big red flag because it means that manufacturing activity contributed negatively to growth in the fourth quarter. With service sector activity also weak, the U.K. economy most likely struggled to grow in the last 3 months of the year. According to the National Institute of Economic and Social Research, GDP grew by a mere 0.1 percent in December, which marked the third consecutive month of slower GDP growth. Producer prices are scheduled for release on Friday and price pressures are expected to have eased. In the manufacturing sector, average input costs fell for the second successive month with the rate of decline accelerating to the most since June 2009.  As a result, we do not expect the Bank of England to share in the European Central Bank’s rosier outlook.

CAD: HOUSE PRICE GROWTH ACCELERATES

There was little consistency in the price action of the commodity currencies today – the Canadian dollar held steady against the greenback while the Australian dollar edged higher and the New Zealand dollar moved lower. The Canadian new housing price index rose by 0.3 percent in November. The strong demand in Toronto and Montreal fueled the better than expected increase. According to Royal LePage, the country’s largest real estate sales organization, the Canadian home prices will continue to climb in 2012 albeit at a slower pace. In contrast, some economists have said housing prices in certain Canadian markets may be too high to be sustainable and are due for a correction. Nonetheless, the latest release by Statistics Canada supported LePage’s claim printing a record high since July. Meanwhile, a survey published by Westpac showed a drop in employment confidence in New Zealand. The survey, which canvassed around 1500 respondents in the December quarter, summarizes households' perceptions of the labor market and personal employment situations. The decline in confidence could stem from the global uncertainty, especially the looming European crisis. If the growth in China, New Zealand’s second largest trading partner is dragged down further by eurozone, the New Zealand economy could encounter more downside risks. However, for the time being, the Aussie and the kiwi retain their appeals as their relatively high interest rate provide better return for investors. Looking forward, with only the release of trade balance from Canada, the comm. dollars could continue to take their cues from the market sentiment.

JPY: TRADE ACTIVITY WEAKENS MATERIALLY

It was a choppy day for the Japanese Yen which strengthened against the British pound, U.S., Canadian and New Zealand dollars but weakened against the euro and Aussie. Unsurprisingly the latest trade numbers from Japan show that the strong Yen had a major drag on trade activity in November. Japan’s current account surplus shrank to Y138.5B from Y562.4B while the trade deficit widened to –Y585.1B from –Y206.1B. If the Japanese government lets the Yen continue to rise without intervention, the current account surplus could turn into a deficit for the first time in 2 years. Yet based upon recent comments from Japanese officials, they are in no rush to act. The central bank’s chief economist believes that 2.2 percent GDP growth for the 2012/2013 fiscal year is not too high because fears of a double dip recession in the U.S. have subsided. He was not overly optimistic, but his views appear to be in line with others. The Cabinet Office for example said service sector sentiment is picking up moderately and the man on the street seems to be feeling a bit better as well about the current state of Japan’s economy according to the Eco Watchers Survey which rose to 47 from 45.0 in December. Their outlook however remained subdued.

GBP/USD : Currency in Play for Next 24 Hours

GBP/USD will be our currency pair in play for the next 24hrs. The UK producer price index will be released at 4:30AM ET/ 9:30 GMT. From the US, we expect the trade balance at 8:30AM ET/ 13:30 GMT, followed by U of Michigan consumer confidence at 9:55AM ET/ 14:55 GMT.

The GBP/USD currently trades in a downtrend, which we determined using the Bollinger Bands. The pair’s nearest support is at 1.5271, a record low since July 2010. A break below that level, the GBP/USD could target the psychologically significant 1.52 handle. On the flip side, the pair’s 10-day SMA could contain to its rally. Further up, the upper first std. dev. Bollinger Band could provide major resistance at 1.5638.

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Comments (1)

koz4933

January 12, 2012 at 07:23 PM ET

I don't understand the term 'short squeeze'. Would you please explain?

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.