One day after we indicated that the yen carry trade is not over, the Japanese currency gains across the board amid surging market volatility and aftershocks reverberating through the U.S. equity sessions on fears that the recession in U.S. .manufacturing will deepen and worries that personal consumption will retreat further.
Former Federal Reserve Chairman Alan Greenspan hit the wires again during overnight Asian trade when he modified his take on probabilities of a U.S. recession, indicating that a recession by year-end is possible but not probable, while reiterating that the worst is over for the U.S. housing market. The remarks came three days after he said a recession was possible in late 2007. The remarks also occurred at the same week when the U.S. fourth quarter gross domestic product growth was revised to 2.2% from the initial estimate of 3.5% a month ago, and U.S. new home sales fell 16.5% for January. U.S. GDP growth has now remained at the 2.0% handle for two consecutive quarters (Q3 and Q4).
At 8:30 am the Fed will release its preferred inflation measure, the January core personal consumption expenditures (PCE) price index. The crucial reading on is expected to be up 0.2% month over month, (previous 0.4%) and 2.3% year over year (previous 2.2%). January personal consumption will also be due, expected up 0.4% from December’s 0.7% increase, which was mainly related to favorable weather conditions. Personal income is seen matching December’s rise of 0.3%.
Also at 8:30 am are U.S. weekly jobless claims, expected to have risen by 325,000 last week after 332,000 in the prior week.
Due 10:00 am is manufacturing ISM, expected by consensus estimates to have edged up to 50.0 in February from 49.3 in January. But with yesterday’s release of the Chicago PMI showing another decline below 50, the probability of a sub-50 reading in the ISM becomes highly plausible, in which case will trigger extended damage to the U.S. dollar, especially against the already strengthening yen.
The January construction figures due at 10:0 am are expected to show a 1.0% decline after a 0.4% drop in December.
Yen extends gains across the board, USD/JPY eyes 117.37 The Japanese yen extends gains across the board as the aftershocks of this week’s equity sell-off begin to reverberate from Asia to the United States after hour trade. The U.S. data situation is not helping either with the GDP, manufacturing and new home sales deepening their slowdown. As volatility lifts up and risk appetite falls, yen becomes the gainer as traders unwind their carry trades, which were used to finance high yielding currencies and equities. Japan’s top financial diplomat Watanabe said overnight that the unwinding of yen carry trades has not yet started, indicating that FX moves would be bigger when such unwinding begins.
USD/JPY breaks below 118 to 117.80s, now eyeing the 117.37 low—61.8% retracement of the 114.41-122.18 move. This target would be broken to 117 in the event of another sub-50 ISM reading. Key foundation stands at 116.70. Upside capped at 118.30 followed by 118.80.
EUR/USD awaits further US weakness to eye 1.3240, EUR/JPY eyes 154 While EUR/USD struggles to reclaim the 1.314 figure, EUR/JPY drops 1.5 yen, showing a bearish engulfing pattern will call up 154.6 before the week end. Euro zone February manufacturing PMI edged up to 55.6 from 55.5, undershooting expectations of 55.8. Meanwhile, Germany’s manufacturing PMI fell to 57.2 from 58.5, undershooting expectations of a no change.
The ensuing volatility and potential weakness in U.S. data, weak consumption and ISM manufacturing, seen triggering 1.3240, followed by increased pressure at 1.3265-70. Support seen holding at the trend line support of 1.3215, backed by 1.3180.
USD/CAD drops as oil dragged off highs and falling gold Although the USD is struggling against the yen, USD/CAD is pushing higher to the session highs on a combination of falling oil (down to $61.92 per barrel from $62.46 high) and falling gold (at session lows of $670 per ounce from $677 session high. This suggests that USD/CAD could target the 1.1735, followed by key resistance at 1.1757, 61.8% retracement of the 1.1877-1.1563 decline. Support stands at 1.1683, followed by 1.1650. Daily MACDs and stochastics increasingly bullish.
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
