Profit Taking Sends Euro to Lows of the Day

Posted on

Market Drivers for Jan 9 2012
Australian retail sales miss
UK Trade balance sees no improvement GE IP tepid recovery
Nikkei up 0.67% Europe up 0.11%
Oil $93/bbl
Gold $1663/oz.

Europe and Asia:
AUD Retail Sales -0.1% vs. 0.3%
EUR German Industrial Production 0.2% vs. 1.1%
GBP Visible Trade Balance -9.2B vs. -9.1%

North America:
CAD Housing Starts 8:15

Currency markets remained in consolidation mode for the second straight day in a row with USD/JPY the one exception to the rule as the pair soared to 87.70 on speculation that BOJ would raise its inflation target and increase quantitative easing. However, by mid morning European trade the pair came off the highs as profit taking once again kicked in.

Many shorts pounced on USD/JPY yesterday after the pair lost the 87.00 figure looking to capitalize on the profit taking move. However, the weak shorts were quickly squeezed out of their positions overnight as the central bank fueled rally sent the pair soaring in Asian session trade.

Still despite the overnight drama we believe that the pair remains grossly overbought on a near term basis. Over the past three years the pair has reached daily RSI readings of 75 or higher only four times and corrected each time it hit those levels. Therefore we believe that USD/JPY has scope to correct towards 85.50-86.00 zone over the next week or so.

In Australia Retail Sales missed their mark printing at -0.1% versus 0.3% eyed. This was the worst monthly reading since May of 2012 and the second negative month out of the last four. The largest drop in Retail Sales came from household goods which declined by 0.9% followed by clothing which fell by 0.6%. Department stores saw same store sales contract by -0.4%.

Overall the pre-Christmas month of November was a decided disappointment as consumers Down Under retrenched especially on the more durable items while maintaining their spending on restaurants and cafes. The news suggests that growth in Q4 is likely to be lackluster as the Australian economy continues to cool off in response to more temperate demand for basic commodities from China.

The Aussie quickly fell below the 1.0500 mark in response to the news but managed to return back to that level after steading in Asia. Still the pair has found resistance at the 1.0520 mark four times over the past several days and the will likely have a difficult time clearing that hurdle given the disappointing economic data and the renewed possibility of RBA rate cuts s demand in Australian economy is clearly tapering off.

The EUR/USD meanwhile was mostly at mercy of EUR/JPY flows and rose and and fell in tandem with the cross. The economic news from the region continued to disappoint as German Industrial Production rose by only 0.2% versus 1.1% expected but it was the first positive month out of the past three.

As North American session was about to start the EUR/USD weakened dropping below the 1.3050 barrier and could selloff further towards yet another test of the 1.3000 figure if profit taking in EUR/JPY begins in earnest. With no economic data on the docket today, the markets may remain in another tight trading range, but if equities begin to sell off, a fresh bout risk aversion could take high beta currencies lower as well. For now profit taking appears to be the dominant theme of the day.

Boris Schlossberg
Managing Director

Leave a Reply

Your email address will not be published. Required fields are marked *