The latest U.S. fourth quarter productivity figure is revised to 1.6% q/q from initial estimates of 3.0%, while unit labor costs are revised to a higher than expected 3.2% increase from 1.7%. The rise in labor costs may not be a necessary inflation danger for the Federal Reserve, as it is widely a result of hefty fourth-quarter bonuses, which may retreat in the second quarter as the slowdown takes a firmer hold. The dollar is mixed, gaining against the euro while erasing overnight gains against the yen after the carry trade took a breather amid ensuing stability in world bourses.
We could see renewed yen gains, however, if today’s U.S. data releases show further erosion, besides the dismal productivity, according to the consensus forecasts for the January factory orders and pending home sales, both of which are expected to show sharp declines (more below). Renewed weakness in U.S. data could trigger fresh selling in world bourses –this time originating from the United States, which could trigger prolonged unwinding of carry trades, which were used to fund not only higher yielding currencies, but also leveraging equity indexes positions in the United States and Europe.
With the two primary engines for world economic growth expected to slow this year (China expects 2007 GDP to slow to 8% from 10.7% and U.S. gross domestic product (GDP) slows to barely 2.0%), the foreign exchange play could remain to favor the low yielding currencies (yen, Swiss) against the commodity currencies (Aussie, Canadian dollar).
The U.S. slowdown story was further signaled by Yesterday’s release of the February services ISM, which fell to a four-month low of 54.3 following January’s 56.7, undershooting expectations of 57. On the bright side, the employment index edged up to 52.2 from 51.7, but the new orders index slipped to 54.8 from 55.4.
Due at 9:00 a.m. is the Bank of Canada (BoC) decision, widely expected to show rates unchanged at 4.25%.
Due at 10:00 am are U.S. factory orders expected to have dropped 4.5% in January following a 2.4% rise in December. The factory orders figure follow last week’s 7.8% plunge in durable goods orders, which was partially blamed on the ensuing market sell-off in the United States. The decline in factory orders follows a 10.5% rise in non-defense spending in December, which s seen as one off event.
January pending home sales index is also due at 10:00 am, expected to pull back 1.4%, following a 4.9% rise in December and a 0.3% drop in November.
Yen pauses for steam, rally is not done The yen weakens by some necessary stability in Asian and European bourses, following yesterday’s three-month highs against the dollar and four-month highs against the euro and the pound. The negative correlation between the yen and global equities remains clear, confirming the currency’s role in funding speculative positions beyond FX.
USD/JPY upside is expected to face interim resistance at 116.80 and 117.20. But with the aforementioned U.S. data expected to show further weakness, renewed selling in USD/JPY is on the cards. With the weekly MACD (moving average convergence divergence) chart suggesting further downside, interim support seen at 116.20 followed by 115.80. Long-term support shows 115.57–- 50% retracement of the 109-122.18 rise, followed by 114.96, the 100-week moving average.
Markets should also pay attention to any remarks from Chinese officials seeking to tame protests from U.S. lawmakers demanding further action on the foreign exchange front, ahead of U.S. Treasury secretary Paulson’s upcoming visit to Beijing. Yesterday, People's Bank of China Governor Zhou Xiaochuan, stated that China is considering widening the yuan-dollar trading band, which is currently limited to a daily fluctuation +(-) 0.3%. Such an outcome trigger further selling in USD/JPY.
EUR/USD supported at 1.3060 EUR/USD pressured by a combination of dollar stability and weak retail sales figures from the Euro zone. Sales fell 1.0% m/m in January and 0.1% y/y, reaching the lowest level in 19 months. On the bright side, the final figures from the European Union show Euro zone fourth-quarter GDP rose by an unrevised 0.9% q/q and 3.3% y/y, more than a full point above the 2.2% seen in the United States . Third-quarter GDP growth was unrevised at 2.7%. First-quarter GDP projections are at 0.4-0.8% q/q and second-quarter projections at 0.4-0.9%.
The decline on the four-hour EUR/USD is seen extending towards the 1.3090 support until the 8:30 data provides further direction, especially with factory orders signaling the latest on the recessionary U.S. manufacturing sector. Subsequent support stands at the 1.3060, which is the 50% retracement of the 1.2940-1.3258 rise. Subsequent foundation stands at 1.3030—61.8% retracement of the said move.
USD/CAD seen eyeing 1.1720, awaits BoC
CAD firms as Canadian building permits soar 11.3% following a revised decline of 7.8% and overshooting expectations of a 1.8% increase. Today’s Bank of Canada decision is expected to show no rate change, but the 2007 outlook in light of the impact of the U.S. slowdown on BoC policy. Yesterday’s release of the IVEY purchasing manager’s index showed a rise to 60.5 in February from 53.8, overshooting expectations of 57.3. The employment index rose to 50.6 from 48.9.
We expect USD/CAD to continue struggling at interim resistance of 1.1790, followed by 1.1820. Unless we see a largely dovish remark from the BoC at 9:00 am, expect USD/CAD to retreat towards 1.1760, 61.8% retracement of the 1.1877-1.1563 decline. Support stands at 1.1725—38% retracement of the 1.1562-1.1824 rise.
Ashraf Laidi Chief FX Analyst CMC Markets US 140 Broadway, 30th Floor New York, NY 10005 (212) 644-4220 (212) 644-4222 faxa.laidi@cmcmarkets.com
