The yen and euro drop across the board, as the former sells-off due to a recovery in risk appetite and global bourses, while the latter is pressured by dovish remarks from European Central Bank President J.C. Trichet, despite a 25-bps rate hike to 3.75%.
The yen retreat follows some aggressive gains during the Asian trading session when U.S. Federal bank regulators ordered troubled sub-prime mortgage lender Fremont to tighten its loan policies and operations in order to avoid future losses from defaults. This was the first move by federal regulators against a sub-prime mortgage institution. The decision had triggered a fresh dose of nervousness, causing a pull back in Asian equities and a brief drop below 4.50% in the U.S. 10-year yields and selling in the high yielding currencies of AUD, USD and GBP. The selling, however, subsided as fears of an all round systemic erosion from sub-prime lenders abated and traders shifted towards this morning’s ECB decision and U.S. data.
This morning’s release of U.S. jobless claims showed a decline of 10,000 to 328,000 helping to calm worries of a surging unemployment claims after the four-week moving average rose to 335,000 two weeks ago, the highest in over a year. The latest decline in claims may help to explain the recent increases to have been a result of sharp declines in temperatures.
We mentioned in yesterday’s report that the release of a weaker than expected ADP report (forecast for private employment payrolls) showing the net creation of 57,000 jobs in February, could suggest that Friday’s release of February non-farm payrolls may come in well below consensus estimates of 100,000. The ADP report has been generally effective in predicting whether non-farm payrolls would come in above or below consensus forecasts, rather than predicting the actual figure. Nonetheless, the ADP’s January report was well out of line with the January non-farm payrolls, when the ADP came in at 152K from December’s 118K, while the January payrolls fell to 111,000 from 206,000. It is worth noting that ADP has made significant revisions to its methodology in predicting private payrolls, in which case make today’s prediction of a dismal 57,000 likely call up a payrolls figure of 50,000 to 60,000. In this case, expect USD/JPY to come under renewed pressure, targeting the 115 figure. This would also increase chances of a May Fed rate cut, in line with our calls for such action since November of last year. This would not only resurrect concerns of an emerging slowdown in the United States, but should provoke fresh sell-offs in global equities, which would in turn accelerate further unwinding of the yen and Aussie carry trades.
Normalization of yield increases chances Fed easing
The chart below shows how the U.S. yield curve has not only shifted by more than 50-basis points from last summer, but displays a less inverted curve (more normal shape) with the 10-year/two-year spread falling to -3 bps, the lowest in about four months. Negative spreads (two-year yield greater than 10-year) suggest a tight or hawkish monetary policy, while a decrease in such negativity means a reduction in hawkishness, or a transition towards more dovishness. The latest weakening in U.S. data is behind the decline in the negative 10-year/two-year spread to -3 bps.
Rise in gold to accompany growth-related dollar decline
The main reason gold prices headed lower during the latest global equity sell-off reflects fears of a slowdown in China, the largest source of demand for commodities. In the event that fresh evidence of a slowing U.S. economy triggers renewed global market malaise, gold prices could be expected to push higher. If Friday’s release of non-farm payrolls comes in less than 100,000, then we could expect gold prices to lift towards the $660 per ounce level until the key resistance of $668 per ounce. An upside payrolls surprise (above 150,000) could trigger gold towards the $631 support.
Yen erases gains amid global market relief After dragging the dollar to the 115.57 low in Thursday Asian trade on fears of a fall-off from U.S. sub-prime lenders, the yen selld-off across the board as markets dismiss such fears. We now see USD/JPY capped at the 117.65 resistance cited in yesterday’s strategy. Renewed downside can result from payroll weakness, fears of systemic collapse from U.S. mortgage lenders and any surprise decisions from Beijing in the lines of widening the daily fluctuation band in the USD/CNY exchange rate.
Euro drops as Trichet makes no promises after rate hike
EUR/USD drops across the board after ECB President J.C. Trichet denied that the central bank was preparing markets for a restrictive monetary policy stance. Markets are likely to drag the euro further towards the 1.3080s in the short-term now that the ECB is not expected to raise rates for another two months, in line with its modus operandi of gradual tightening. Key support stands at 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. Upside capped at 1.3180, until Friday’s U.S. payrolls sets the tone.
AUD/USD capped at 78.15, until gold recovers on U.S. weakness
The similarity between the gold chart above and the Aussie chart below suggests that any recovery in gold towards the $660 figure, could be accompanied by a AUD/USD strengthening to 78.15 from the current 77.70s, with subsequent resistance standing at 78.45. Conversely, traders wishing to capitalize on an upside surprise in Friday’s payrolls, could consider A potential Aussie pullback to the 77.40s, backed by 77.10.
Ashraf Laidi Chief FX Analyst CMC Markets US 140 Broadway, 30th Floor New York, NY 10005 (212) 644-4220
(2120 644-4222
a.laidi@cmcmarkets.com
