The U.S. dollar shows resilience in the face of unofficial results showing a Democrat majority in the U.S. Senate after the party won the Senatorial race in Virginia by more than 7,200 votes, giving it dominance in both chambers of Congress. While a Democrat-led Congress and Republican White House are seen the embodiment of policy gridlock, we doubt the extent to which the president would exercise his veto especially in his final two years in office.
Although we mentioned in yesterday’s note the latest shift in Congress could prompt Defense Secretary Rumsfeld’s resignation, the announcement was unexpectedly early. The announcement had no significant impact on foreign exchange, but the potential for a structural change in the U.S. approach to its Mideast policy and the Iraq war could support the dollar if a less interventionist policy is to be anticipated.
The dollar is higher against the yen and the Aussie, while pressured against the European currencies, as the Japanese currency is sold off across the board and the Aussie is hit by the unexpected loss in jobs, signaling the end of the 4 ½ year tightening cycle. (More below).
We expect today’s release of the U.S. September trade deficit to have declined to as low as $60 billion from August’s record $69.9 billion, thanks a decline in the oil import bill and a steady rise in exports. Imports are seen falling by as much as 3.0%, while exports are seen up by over 2.0%. Consensus forecasts point to a trade deficit of $65.8 billion. Considering the current upward momentum in the dollar, we deem any figure below $65 billion to be supportive for the U.S. currency, particularly against the yen and the Aussie. Nonetheless, some consulting services are reporting rumors that the trade deficit could swell to a record high of $72-74 billion.
Traders should also watch the U.S. weekly jobless claims and the preliminary November University of Michigan sentiment survey. Dollar could come under pressure if jobless claims remain above the 320K figure, suggesting the U.S. job market has peaked after last month’s 4.4% unemployment rate. A consumer sentiment index of less than 92-91 should be dollar negative, while a figure of at least 93 is seen is USD supportive.
Yen hit across the board The lack of any remarks from Japan’s central bank and finance ministry has given way to broad selling in the yen, after several days of hawkish comments from Bank of Japan (BoJ) and Ministry of Finance officials, with the former signaling a rate hike could take place before year-end. But the yen’s upward run was tempered on Tuesday when BoJ policy board member Atsushi Mizuno — known for his hawkishness — offset hawkish remarks made by Governor Fukui the previous day.
Improved technical momentum in USD/JPY eyes the 118.20 resistance, which is subject to breach in the event of a sub $65 billion U.S. trade deficit. Subsequent target seen at the Nov. 6 high of 118.45-- 61.8% retracement of the decline from the Oct. 24 high. Key resistance stands at 118.70. Support seen starting at 117.75-80, but only a deficit of more than $70 billion is seen breaching below 117.59. Traders should also watch the University of Michigan sentiment survey, where a figure below 92-91 is seen neutralizing dollar bullishness.
Euro awaits U.S. trade figures Improved fundamentals in the Euro zone are seen supporting the EUR/USD even in the event of a notable improvement in the U.S. trades deficit i.e. less than $65 billion. Further optimism on the Euro zone was seen in the European Central Bank survey of private economists, reporting a rise in the average 2006 gross domestic product (GDP) growth forecast to 2.6% from 2.2%, and a rise in the average 2007 GDP growth 2.0% from 1.8%. 2007 inflation forecast remained at 2.1%
EUR/USD seen increasingly toppish at the 1.28 figure, with key resistance remains at 1.2830. Support starts at 1.2740, followed by the 200-day moving average at 12710.
Pound lower after BoE rate hikeThe pound heads lower after the Bank of England makes its much anticipated 25-basis point rate hike, lifting its base rate to 5.00%. The BoE noted continued inflationary pressures despite falling oil prices and a rise in unemployment. We do not rule out one more rate hike next year until we see next week’s quarterly inflation report, which should provide a better gauge of the central bank’s inflation concern.
Separately, Britain's trade deficit narrowed for the second straight month, falling to GBP 6.6 billion from a revised GBP 6.9 billion, but higher than the consensus of GBP 6.5 billion.
Cable consolidates around the 1.9050s, but a negative bias is seen emerging, which could call up the preliminary support of 1.9010. Key foundation stands at 1.8980. Upside faces pressure at 1.9080, followed by 1.91.
Aussie damaged as RBA rate hike signals peak
The unexpected decline in Australia’s full time employment by 32,100 in October from to 10.26 million should bring an end to the 4 ½ year tightening cycle, as aggregate employment makes a clear downturn off the August peak, following an uninterrupted increase since the past 12 months. The 48,600 decrease in full time employment versus the 16,600 increase in part time employment signals a more fundamental weakening in the labor market. Meanwhile, the decline in the unemployment rate to 4.6% from 4.8% signals that the economy has peaked.
We noted on Monday ahead of the RBA rate hike that the central bank decision little impact on the Aussie, not only because the outcome was widely expected but also because it will not be accompanied by any statement from the RBA, until next Monday. The other major factor distracting the impact of the decision was the ensuing US Congressional elections and the preliminary poll results.
Now with the uncertainty of U.S. elections out of the way, and the weakness in Australia’s job markets anything but an uncertainty, confirms that the overnight rate has peaked at 6.25%, which should encourage traders to unwind their Aussie carry trades against the yen and Swiss franc.
Traders should obtain further clarity after Monday’s RBA statement, which could become an essential green light for ushering in a sweeping slowdown. With the trade deficit at 4-month highs due to declining mining and farm exports and the undergoing draught exasperating job losses, all the elements are in play for calling up the 76.0¢ figure in the AUD/USD.
AUD/USD breaks below key 76.70 support, now nearing the 76.30 target—38% retracement of the rise from the 74.15 low (Oct. 12) to the 77.64 high (Nov. 02). 76.10 may provide temporary stability, but 75.90 (50 retracement) should follow suit. Major support stands at the 100-day moving average of 75.60. We also expect the pair to sustain further selling after what we see a larger than expected drop in the U.S. September trade deficit to USD $60 billion from USD $69.9 billion, undershooting expectations of USD $65.8 billion.
Ashraf Laidi Chief FX Analyst CMC Markets US 140 Broadway, 30th Floor New York, NY 10005 (212) 644-4220 (212) 644-4222 a.laidi@cmcmarkets.com
