The dollar recovered some of the lost ground seen in the Asian session against the euro, yen and sterling, but remains firm against the struggling Aussie. Gold hits a five-month high at $653 per ounce, while oil prices regain the $55 per barrel level, shrugging off Wednesday’s report of higher U.S. oil inventories as cold weather in the Northeast United States and spillover from the strategic petroleum reserve (SPR) increase continues to support. The customary “pre-G7 Talking FX” chorus is now underway as finance and economics officials exchange ideas on whether yen weakness will be discussed at next month’s meeting of G7 finance ministers and central bankers. So far, neither Germany nor Japanese officials made a point at bringing up yen weakness. Yet, we expect traders’ cautiousness ahead to provide temporary support for the yen, rather than act as a significant source of upside in the days ahead.
U.S. weekly jobless claims rose 36,000 to 325,000 last week, overshooting expectations of a 310,000. The figure follows the prior week’s tumble to an 11-month low of 290,000, which was attributed such to unusually warm weather. For these reasons, the higher than expected number may not be necessarily dollar negative as traders await the housing numbers —see below.
The all-important existing home sales figures are due at 10:00 am, expected to have declined to 6.25 million in December from November’s 6.28 million. It would be the first monthly drop after two-straight increases. Given the dollar’s weakening bias this morning, a renewed decline in the housing figures may help support EUR/USD at 1.2970 and cap USD/JPY at 121.00. But traders are cautioned to follow closely the developments in oil prices
USD/JPY pressured by G7
Despite the 70-pip recovery to 120.90 over the past eight hours, speculation that the G7 may express concern with yen weakness is increasingly acting as a barrier at the 121.80 level. Japan’s Finance Minister Omi said he has not heard about any euro/yen discussion in the upcoming G7, while Vice Finance Minister of International Affairs Hiroshi Watanabe said he did not see the yen as a major topic and that currencies should be discussed on a macroeconomic level. Separately, Bank of Japan’s policy board member Miyako Suda said the central bank would need to take certain risks in making monetary policy decisions and that consumer price index (CPI) weakness alone would not affect monetary policy decisions.
Boosting the yen in Asian trade was a 22.8% increase in Japan’s trade surplus year over year to 1.115 trillion yen in December. The surplus fell 7.0% to 8.095 yen in 2006.
With the high yielding Aussie damaged by Tuesday’s softer than expected CPI and sterling pressured by the high level of dissent in this month’s rate hike, there may be a temporary dissipation in carry trades, which would likely cap USD/JPY at 121.80. Markets may be ready to fuel fresh gains in the pair if Friday’s CPI release (due Thursday evening) shows another 0.2% y/y increase in January. This may provide source of renewed gains past the 121.80. Interim resistance stands at 121.80, followed by 122.20. Support starts at 120.40, backed by 120.
Euro seen capped at 1.3040, IF O mixed The higher than expected U.S. weekly jobless claims is supporting EUR/USD at 1.2975-80. This could set the foundation for further gains past the 1.30 figure and onto the 1.3050 upon what may be weaker existing home sales from the United States. Rising gold prices may also help underpin the single currency. Germany’s Deputy Economics Minister Pfaffenbach said his country was not planning to place yen weakness on the G7 agenda, indicating that yen weakness is a matter of concern but is for the markets to deal with.
German businesses grew less optimistic in January, partly due to this year’s VAT increase, but their six-month outlook showed brighter assessment. The IFO business climate slipped to 107.9 in January from 108.7 in December, undershooting expectations of a new 16-year high at 108.9. This was the first decline since July. The situation index slipped to 112.8 from 115.3, but the expectations index rose to a seven-month high of 103.2 from 102.5.
EUR/USD support starts at 1.2950, followed by 1.2920. Only an unexpected gain in U.S. home sales should challenge this level and possibly call up the 1.29 figure.
Aussie eyes 77.60 cents, as RBA tightening cycle seen ending AUD/USD continues its slump, now falling below 78¢ to 77.85, as the currency remains damaged by Tuesday’s soft CPI, which dampened expectations of a February Reserve Bank of Australia (RBA) rate hike from as much as 80% chance to now less than 10%. This will help conclude the central bank’s five-year tightening cycle and could extend losses towards the 77.50.
We expect AUD/USD to sharpen losses towards 77.60 in the event of a rise in the U.S. existing home sales. But even a figure of no less than 6.25 million should help drag AUD/USD towards 77.70 before stabilizing around the 77.90s. Upside capped at 78.20 and 78.40.
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
