The U.S. dollar has lost all of Friday’s gains and entered a new selling wave after the U.S. administration said it would file complaints at the WTO targeting China’s piracy of U.S. copyrighted movies, music, software and books. The action is fuelling speculation of retaliatory acts from Beijing, which has already reported it will not attend this week’s G7 meeting in Washington, DC.
Any signs of retaliation from China to Washington’s decision will clearly weigh on the U.S. dollar. Recall that the U.S. dollar dropped sharply one week ago on news of Washington’s decision to impose tariffs Chinese subsidized paper industry. History has shown consistent empirical evidence that nations pursuing protectionist rhetoric will experience declines in the value of their currencies. This occurred during the Clinton Administration’s trade war with Japan and more recently in 2002 upon the Bush Administration’s decision to slap tariffs on foreign steel. The decision coincided with the peak of the U.S. dollar. Since February 2002, the dollar has dropped 58% depreciation against the euro, 13% against the yen and a 32% in trade-weighted terms.
Iran’s nuclear ambitions are also contributing to the dollar’s woes against European FX after Tehran’s announcement of its ability to produce nuclear fuel on an industrial scale. This comes less than three weeks after the UN Security Council has informally agreed to step up sanctions on Iran.
Markets do not buy into Friday’s payrolls
Friday’s better than expected U.S. payrolls have failed to temper concerns of a slowing U.S. economy. Despite the 180,000 increase in non-farm payrolls and the 4.1% jobless rate, which matched the lowest reading since May 2001, the bulk of the recovery took place in construction jobs, which netted 56,000 jobs, following a net decline of 61,000 in February. Improved weather conditions in March were a key factor in the construction payback, but evidence of continued structural weakness in the sector remains dominant. The 16,000 decline in manufacturing jobs was the ninth-consecutive monthly decline in the sector, in line with the weak employment component of the ISM manufacturing falling below 50 in five out of the past seven months. The net slowdown in services jobs to 137,000 from 180,000 pushed down the three-month moving average to 148,000, the lowest level since July 2006. The three-month average of the headline payrolls also fell to an eight-month low. The pick up in education/healthcare and retail jobs was notable, but the quality of these jobs remains to be seen as the categories have proven to be part time and of temporary nature.
AUD/USD at 17-year high on M&A, rising uranium and protectionist greenback
AUD/USD soared to fresh 17-year highs with the help of steady employment growth in construction and uranium prices soaring to all time highs at $113 per pound. Australia’s is the world’s largest exporter of uranium. The A$17.4 billion bid for Australia’s Rinker Group by Mexico’s cement giant Cemex is also encouraging flows into the Aussie. Despite last week’s decision from the Reserve Bank of Australia not to raise interest rates, there are is speculation of such a move in May. At this point, we do not see a rate hike from a central bank which has not cut interest rates in more than five years and whose currency stands risks exasperating an already swelling trade gap.
AUD/USD is seen capped at 82.45, followed by 82.60. The short-term MACDs (30 minutes and 60 minutes) all show an impending negative divergence, which suggests declines towards the 82.20 and 82.05. We see more attractive opportunities in being long the Aussie against sterling, while favoring the euro and Canadian against the Aussie.
Euro seen capped at 1.3445, Fed speak to offset
The single currency regained the 1.34 figure in Tuesday Asian trade as players saw the 1.3360s as attractive entry territory. The dollar’s overall damage is highlighted on a combination of Washington’s protectionist rhetoric and an unconvincing payrolls report. Market cautiousness ahead of Thursday’s European Central Bank (ECB) press conference is also fuelling the euro, as ECB president Trichet is likely to signal a May rate hike with the use of the word “vigilance” in describing the bank’s anti-inflation stance.
We do not expect the euro to breach above 1.3445 due to the concentration of speeches from Federal Reserve officials (Mishkin, Fisher and Plosser at 9:30 am, 1:20 pm and 7:30 pm), which are likely to reiterate the central bank’s inflation discomfort and help stabilize yields and the U.S. dollar. This may drag the pair towards the 1.3390s and find support at 1.3370. Subsequent support stands at 1.3360.
Cable’s recovery seen capped at 1.9750
Cable recovers from its Monday lows of 1.9596 on the back of the dollar’s overall sell-off, but we continue to see the pair capped at 1.9735—61.8% retracement of the 1.9821-1.9590 decline. A breach above 1.9750 is seen capped at 1.9770. We continue to see the pair as viable means for offers during dollar pullbacks, with 1.9720s and 1.9730s as attractive entry points for targets at 1.9650 and 1.9630s. Sterling crosses such as EUR/GBP and CAD/GBP are also seen as the more attractive options.
USD/JPY remains only green USD pair for the greenback
USD/JPY remains the only dollar pair in the green for the greenback on a combination of escalating risk appetite fuelling commodities and equities and the Bank of Japan’s ongoing discomfort with deflation. The yen becomes the path of least resistance for a rising dollar following the stronger than expected U.S. payrolls. Increased signs of U.S. economic weakness are proving to have less of an in impact in boosting the yen than are fears of mortgage defaults in the United States. The latter increases fears of rising systemic market risk and can weigh on global risk appetite and Japanese-driven liquidity.
Yen weakness is not being regarded as topic of this week’s G7 meeting as was the case in the February meetings in Berlin. Despite the 5% rise in the currency following the market events of late February, the currency has dropped ½ of those gains.
We do not expect today USD/JPY to breach the key resistance of 119.50, which is the 61.8% retracement of the 122.08-115.14 decline resistance. Medium term pressure point stands at the trend line resistance of 119.75.
USD/CAD hits four-month highs, eyes 1.1450 target (200-day MA)
Improved Canadian fundamentals (last week’s jobs report, IVEY survey and rising oil prices) and deteriorating USD sentiment is dragging the USD/CAD further below the 1.15 figure to 1.1477, the lowest level since December 21.
Market will likely extend the declines towards the major 1.1450 support, which is the 200-day moving average (technical level not breached since last November) and the 50% retracement of the 1.1028-1.1874 rise. Subsequent foundation stands at 1.1430. Upside capped at 1.15 and 1.1530.
Ashraf Laidi Chief FX Analyst CMC Markets US 140 Broadway, 30th Floor New York, NY 10005 (212) 644-4220a.laidi@cmcmarkets.com
