The weaker than expected 2.5% rebound in February durables following the 9.3% plunge in January (revised from earlier 8.7%) is accelerating the dollar sell-off predominantly against the yen and to a lesser extent against European FX and antipodean currencies.
Yen surges back taking risk aversion with it
The yen rose across the board amid a resurgence of risk aversion following unsubstantiated rumors of a military confrontation between the United States and Iran in the Persian Gulf and repatriation flows by Japanese institutions ahead of the end of the fiscal year by end of the week. Despite the fact that U.S. authorities refuted the Iran rumors, the current impasse involving the detained British sailors by Tehran is raising the fear scale on the geopolitical front, contributing to an 8% spike in crude oil to $68 per barrel, the highest level since early September. Gold prices also pushed higher, reaching $668 per ounce, almost a four-week high. News that number three U.S. home builder Lennar withdrew its 2007 earnings forecast have also helped resurrect fears that the prospects for the U.S. housing sector are worsening.
Bernanke’s inflation vigilance may be overshadowed by his housing concern
Attention shifts to Fed Chairman Bernanke’s 10:30 am EST testimony on the economic outlook before the Joint Economic Committee of the U.S. Congress. Although we do expect Bernanke to reiterate the Fed’s inflation discomfort, we expect the market’s scrutiny of Bernanke’s concern with the housing market decline in general, and sub-prime loan defaults in specific to generate a downbeat dollar reaction and modest declines in U.S. yields. Bernanke may be pressured to come up with a more detailed assessment regarding the deterioration of the U.S. housing slowdown beyond simply describing it as “adjustment …is ongoing” as was indicated in last week’s FOMC statement. Bernanke may not be expected to sound off the usual sanguine tone on housing, especially when testifying to a group of anxious lawmakers, who are representing constituencies affected by the sub-prime fallout.
As Mr. Bernanke gives a more detailed view on the Fed’s downgrading of the housing sector, we expect the market to continue dragging the dollar lower and trigger further yen gains. Recall that in the semi-annual Congressional testimony last month, Mr. Bernanke said, ”The distress in the sub-prime area is a significant concern.”
Thus the bottom line is that it is unlikely to expect currency markets to push up the dollar on a hawkish take by Bernanke at a time when the housing uncertainty is far from over and the impact on sub-prime lenders and home builders is unknown.
Yen broadens gains amid fresh carry trade unwinding, eyes 116.40 The declines in Asian and European bourses as a result of nervousness on the Iran front and uncertainty with the U.S. housing concerns are reviving the sell-off in higher yielding FX in favor of the yen. Having broken below the 200-day moving average of 117.67 and below the 117.20 support—38% retracement of the 115.22—118.40 clears the way for the 117.00 trend line support holding since the Mar 6 low. Subsequent major target stands at 116.40—the 61.8% retracement of the 115.20-118.48 move. Upside capped at 117.70 and 118.
EUR/USD struggles at 1.3370
One day after an unexpected increase in Germany’s IFO business sentiment, expectations of additional Euro zone rate hikes were further boosted improved German consumer confidence and rising money supply. Euro zone M3 hit a fresh 17-year high when the y/y figure rose 10% in February from a revised 9.9%. Germany GfK consumer confidence rose to 4.4 for April from 4.3 in March due to “a continuation of the very optimistic prospects for the economy … on both buying propensity and income expectations.”
Traders are reluctant to push EUR/USD beyond the 1.3370 resistance before Bernanke’s testimony. Further unwinding of carry trades favoring the yen may leave EUR/USD capped at 1.3360s and impose pressure towards 1.3320s. Only stepped up housing concern from Bernanke and renewed declines in durables see EUR/USD breach above the 1.337 trend line resistance and onto the 1.34 figure. Support stands at 1.3320, backed by 1.33.
Sterling eyes 1.96, risk from unwinding Sterling pulled lower on a combination of weaker GDP growth, slower home prices and a rising current account deficit. Nationwide’s home prices slowed to 0.4% m/m in March, below estimates of 0.7%, and to 9.3% y/y, below estimates of 9.6%. Q4 GDP growth was revised down to 0.7% q/q from the preliminary reading of 0.8%. The Q4 current account deficit rose to GBP 12.7 billion from a revised GBP 10.5 billion, beating expectations of GBP 9.4 billion.
Our lack of optimism for cable leads us to see further selling in the case of fresh unwinding of carry trades, especially amid the Bank of England’s relaxed inflation stance and latest slowdown in home prices. Expect interim support to start at 1.9620, followed by 1.9580. Rallies towards the 1.9650s are seen short-lived.
Ashraf Laidi
Chief FX Analyst
CMC Markets US
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New York, NY 10005
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(212) 644-4222
a.laidi@cmcmarkets.com
