9:56 am update:
The U.S. dollar extends its pullback as the drop in U.S. services ISM to a four-year low is offsetting any upside reaction from Iran’s decision to free the 15 British sailors. The fact that the much touted services sector is now joining its manufacturing counterpart in a slowdown mode raises questions about the prospects of a soft economic landing.
The headline figure of 52.4 was the lowest since May 2003, while the employment index fell to 50.8 from 52.2, the lowest level since July 2004. We already saw the employment component of the manufacturing ISM dipping back into contraction territory at 48.7 to show five months below 50 out of the last seven months. This augurs badly for Friday’s payrolls, especially with the three-month average in manufacturing, construction and services all heading lower. In fact, the three-month average in services jobs fell to 173,000, the lowest since August.
Now that the U.S. economy is showing unequivocal signs of a slowdown, markets will see a rise in the unemployment rate as the key to Fed easing. Thus, in the event that the jobless rate rises to 4.6% from 4.5%, along with a payrolls remaining lower than 110-120,000, markets will deem the report as an additional step towards a June rate cut.
The data will further support the strength of the 119.20 resistance in USD/JPY, and now calls up declines towards the 118.60s, with preliminary target standing at 118.40, but stability is seen at 118.00. The pace of USD/JPY declines may pickup in the event that U.S. equities sink into negative territory. EUR/USD breaks above 1.3360 resistance, eyeing the key 1.34 barrier, which can be tested prior to Friday's payrolls. The dollar retreat could be intensified against European FX in the event the Bank of England (BoE) raises rates tomorrow, which we do not expect. EUR/USD upside seen remaining at 1.39, while GBP/USD remaining at 1.98. Our preferred trade remains EUR/GBP, with target at 68.00 from current 67.65.
7:14 am
This morning’s U.S. figures will be dominated by the ADP National Employment Report (8:30 am EST) on private payrolls and the U.S. services ISM (10:0 am EST). The new and improved forecasting methods of the ADP surveys have led the February survey of 57,000 (from 121,000 in January) to be in line with the sharp slowdown in the non-farm payrolls to 97,000 from 146,000. The ADP survey has had a solid record (about 65%) in predicting the direction of the non-farm payrolls. Therefore, any figure of more than 100,000 to 110,000 in the ADP may foretell a recovery in March payrolls to the 110,000 to 130,000 range from 97,000 in February.
The 10 am release of the services ISM will be largely scrutinized, with market consensus expecting a rise to 55.0 in March from 54.3 in February. This follows a widely dismal ISM manufacturing survey on Monday. Markets will especially watch the employment component of today’s ISM for to help determine the services payrolls in Friday’s labor report. The employment index stood at 53.2, 51.7 and 52.2 in December, January and February respectively. It is worth mentioning that the three-month average of the services sector in the payrolls report has fallen for the past two months, reaching the lowest level in six months.
Also at 10 am are February factory orders expected to have edged up 1.8% after a 5.6% decline in January. Orders of durable goods have are also expected to have been revised by as much as 2.0%.
The Reserve bank of Australia's decision to leave rates unchanged at 6.25% came as a surprise to many, driving the Aussie down by more than a full cent to 80.66 before recovering to 81.40. The decision helped cool flows into carry trade plays, but these could be renewed following further retreat in geopolitical risk and improved U.S. data.
EUR/USD seen continuing tight ranges
A host of positive figures helped the euro recover from 1.3320s to 1.3360s. Euro zone services PMI rose to 57.4 from 57.2V. German orders rose 3.9% in February, overshooting expectations of a 0.5% increase, while rising 9.3% y/y. The January figures were revised higher to -0.3% from -1.0% m/m, and to 8.2% from 7.8% y/y. There was also an increase in Euro zone retail sales of 0.3% m/m from -0.8% in January, and 1.2% y/y from January's revised 1.1% increase. The figures are seen as further evidence that German consumers have largely taken this year’s VAT hike in stride.
We predicted in yesterday’s piece that the four-hour chart suggested further declines to target the 1.3330s. The pair has now recovered from overnight lows of 1.3319 and shows to have built interim support at 1.3335. Longer-term trend line support stands at 1.3315, which extends from the March 26 low. Key foundation stands at 1.3285, which is the 38% retracement of the 1.3085-1.3710 rise. This morning’s U.S. figures will be instrumental in shaping the short-term Euro moves. Euro may be capped at 1.3370 as long as ISM remains above 54 and the employment component does not drop below 51.
The pair, nonetheless, is likely to be underpinned by markets’ expectations of a Bank of England rate hike this Thursday. Upside remains capped at 1.3390, which is unlikely to be tested before Friday’s payrolls, barring new geopolitical developments.
USD/JPY resistance remains at 119.20
Yen continues its lackluster performance due to a relative stabilization on the risk meter as far as Iran and sub-prime defaults are concerned. Pre G7 rumblings have already started with conflictive remarks on whether yen strength will be discussed. Ex-BoJ member Hirano said that the EUR/JPY would not be a topic, while Canada's Finance Minister Flaherty said he plans to discuss the yen with his Japanese counterpart. The G7 finance meeting is in Washington on April 14 and 15, coinciding with the annual IMF/WB spring meeting.
The pair remains widely dependent on U.S. data. Key resistance stands at 119.20, which is the 55-day moving average as well as the 61.8% retracement of the 121.62-115.14 move. Upside surprise in U.S. data risks breaching this barrier, but subsequent resistance stands at 119.50. Support starts at 118.50, followed by 118.20.
We do not expect a BoE rate hike tomorrow
Cable is on the retreat on a combination of cautiousness ahead of this morning’s U.S. data and scaled down expectations of a rate hike tomorrow from the Bank of England. UK services PMI to 57.6 in March from 57.4, overshooting expectations of 57.5.
Speculation of a BoE rate hike surged earlier this week when the Times "shadow" monetary policy committee has called for a rate hike this week. The shadow MPC is organized by the Institute of Economic Affairs and has accurately predicted all of the BoE’s last three rate hikes, including the two shock rate hikes of August 2006 and February 2007. All but one of the nine-member shadow MPC say the BoE should raise rates by 25 basis points this week to 5.50%. Considering the predominantly neutral testimony by MPC members to Parliament two weeks ago and the existing pound strength against the euro and the dollar, we expect Thursday’s decision to be a close call in favor of leaving rates unchanged. We expect cable to remain supported at 1.9680, unless U.S. data surprises to the upside, in which case could drag the pair further down to 1.9660. Neutral bias should keep cable capped at 1.9780. Resistance stands at 1.9820.
Ashraf LaidiChief FX AnalystCMC Markets US140 Broadway, 30th FloorNew York, NY 10005
(212) 644-4220
(212) 644-4222 fax
a.laidi@cmcmarkets.com
