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Friday December 19, 2008 - 11:00:07 GMT
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Forex Research - Euro Unwinds Rally As Volatility Massive, Liquidity Scarce
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KATHY LIEN
BORIS SCHLOSSBERG
Euro Unwinds Rally As Volatility Massive, Liquidity Scarce Last Updated 12/19/2008 5:17:47 AM EST (GMT +5)
Top Stories
Overnight Eco
Event Risk on Tap
Price Action
As we approach the holidays the currency market has taken on all the characteristics of Florida weather – just wait a minute and it changes. After completing a spectacular parabolic rise yesterday, the unit reversed course and produced an almost as impressive a fall in today’s early European trade. The pair went into a nose dive dropping more than 200 points in 20 minutes as it hit a low of 1.4040 before bouncing above 1.4100.
The sharp unwind was exacerbated by the euro selling on the crosses, especially EUR/GBP which only yesterday reached the stratospheric highs of 9550 before dropping to 9350 in today’s session. The remarkable volatility has no doubt been amplified by lack of liquidity in holiday thin markets, but the primary impetus behind today’s downside move was most likely caused by yesterday’s ECB’s announcement to cut its deposit rates in effect discouraging market players with leaving money at the central bank in their desperate hunt for yield.
Some analysts have calculated that the sudden rise in the euro this week was equivalent to a 175bp worth of tightening, prompting EZ fiscal officials to raise concern over the volatility in the pair. However, today’s descent should ease some of those worries, assuming the EUR/USD does not stage yet another vertical rally by end of day. Given the fact that the strength in the unit was driven strictly by yield considerations, yesterday’s ECB move may have broken the will of euro longs, and it appears that for now much of the steam has gone out of the rally.
Nevertheless, the currency markets remain the most treacherous capital markets in the world for the time being with unprecedented volatility the rule rather than the exception. With no data of consequence in North American session to drive trade, volatility is likely to continue into Friday’s close. With euro bears having pushed the pair into the 1.4000 figure a stop run on the 1.4000 barrier now appears to be the next logical move.
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About The Author
Schlossberg has more than 20 years experience financial trading on Wall Street. His daily currency research appears in numerous newspapers worldwide and Schlossberg serves as a regular contributor to CNBC's Squawk Box and Bloomberg radio and television. Read more >>