The dollar’s technical outlook has taken a turn to the worse on a combination of aggressive pre-G-7 currency talk favoring yen stability and an 18% increase in oil prices over the past three weeks.
Oil rebounds as fast as past decline An 18% rise over a three-week period is as significant as a 20% decrease over the four-week period from mid December to mid January. The significance of the recent oil increase is such that U.S. consumers may start to struggle in spending their way to an economic soft landing and keeping intact the Goldilocks scenario, neither too hot nor too cold. A prolonged slowdown in U.S. housing would raise risks of a double whammy for the U.S. economy, especially at a time, when U.S. manufacturing deepens in a recession.
G-7 may trigger further yen moves, but short-livedOne week ago, it was unthinkable that the official communiqué on foreign exchange markets would address the yen’s excessive weakness. But the fact that currency had hit a 21-year low in trade-weighted terms, all-time lows against the euro and eight-and-a-half-year lows against the British pound, qualifies the yen’s weakness to be tabled in the discussions to the extent of triggering notable market moves. Thus, even if the official statement on foreign exchange sticks to its usual generic format, along with addressing China’s foreign exchange regime, as was done in the last two G-7 meetings, there exists the potential for further yen moves vs. the Aussie, euro, sterling and U.S. dollar. European officials are clearly capable raising the volume of their demands for “more FX stability” as has already been demonstrated by German ministers.
Yet, we see the yen’s fortunes improving mainly against the Aussie (target 92 by end of week, from current 93.28), the euro (154.20, from current 155.95) and British pound (232, from current 236.70 in the event that the Bank of England does not surprise with another rate hike this week). Downside in USD/JPY is seen limited to 119.20-25, before consolidating into a lower range inside the 119.00-120.00 range.
Break of 10-year yields/prices, foretells further dollar declinesWe warned last week that the price of the 10-year Treasury note (March 2007 contract) was testing higher towards the 107 figure (equivalent of yield testing lower towards 4.81%). We stated that we “expect a breach of the two-month trendline resistance at 107.17, equivalent to a yield of 4.75” adding that we added that: “Transitioning this analysis into tomorrow’s non-farm payrolls, the charts suggest a potentially disappointing report may be in store, which is a negative for the U.S. dollar.” Indeed, payrolls were disappointing and the dollar did decline, before ending higher on talk that the ECB will pause for longer than expected.
Finally today, the 10-year T-note broke the two-month trendline (price broke resistance to 107.18 high, and yield broke support to 4.76%), opening the way for further headway towards the 107.30s until 107.50 resistance, corresponding to a yield of 4.71% from the current 4.77%. This translates into further dollar downside, especially as the oil factor manifested itself into the U.S. dollar index ‘failure to break above its 200-day moving average for the fourth time in less than one week.
Further USD/JPY downside until 119.20s
We expect the continued speculation ahead of the G-7 and lack of U.S. economic data as well as rising oil prices to produce a bitter recipe for the dollar/yen, with selling seen extending towards the 119.25—39% retracement of the 114.54-122.18 rise. While the potential for a price reversal exists after the G-7 meeting, we are concerned with the onset of further dollar selling ahead of the meeting.
EUR/USD apt to break 1.30 to 1.3025-30
Despite the scaling down of the ECB tightening expectations, we expect further upside strengthen towards the 1.30 figure and attain the eight-week trendline resistance at 1.3030, which is also the 38% retracement of the 1.3295-1.2866 decline. Sources for euro upside/dollar downside include oil price escalation and hawkish ECB press conference.
Ashraf LaidiChief FX AnalystCMC Markets US140 Broadway, 30th FloorNew York, NY 10005(212) 644-4220(212) 644-4222a.laidi@cmcmarkets.com
