The decline of only 3,000 in U.S. weekly jobless to 339,000, following the prior week’s jump, may prove disappointing for the already jittery markets. There were expectations that claims would fall by some 20,000 after the prior week’s surge was deemed a result of Good Friday Holiday related effects.
Carry trades are unwound throughout global markets and equities sell off across the board after a higher than expected 11.1% rise in China’s first quarter gross domestic product (GDP) raised nervousness of further interest rate hikes in China, thus, possibly risking a slowdown in global demand. China’s benchmark stock index fell to as low 4.7%, triggering subsequent declines in Asia and Europe. We had warned in our Wednesday evening note “China’s GDP may threaten carry trades” of the risk to the prolonged carry trades in the event of another China-driven global sell-off. The unwinding is taking place as the Japanese yen is rallying across the board, while higher yielding currencies such as the sterling, Aussie and Kiwi are all selling off. GBP/USD is now testing just above the $2.0 level, falling from as high as 2.0094. Meanwhile, gold is off by more than $5.00 per ounce to $685.
Markets shift attention to a string of U.S. releases; U.S. weekly jobless claims (8:30 am), March U.S. leading indicators (10 am) and the April Philadelphia Fed survey (12 pm) will be highly scrutinized
The Leading indicators index is expected to have risen 0.1% in March after declining 0.5% and 0.3% in February and January respectively. Rising equities and falling jobless claims may have contributed to the rebound but a negative figure would be an unwelcome surprise to the already shaky sentiment in the midst of the China-driven declines in global equities.
The day’s more important report will be the 12 pm release of the Philly Fed activity index on manufacturing, expected to have edged up to 2.0 in April from 0.2. Markets will especially watch the sub components on new orders and employment, both of which edged up to 1.9 from -0.5 and to 2.3 from -0.4. A decline in the prices paid index to below 15 from 21.8 would be dollar negative in the event that the headline figure comes in below 3.0.
USD/JPY seen stabilizing at key 117.50 support USD/JPY fell from its 118.68 highs to 117.60 in line with our charts strategy sent yesterday evening. The breach below key support of 118.00 to the 117.60 low was a result of the unwinding in yen carry trades. Conflicting reports of an early rate hike from Japan —as early as May—also boosted the yen. The key support figure stands at 117.50, which is not only the 50% retracement of the 115.20-119.87 rise but also the lower bound of the upward channel, extending from March 5. Negative readings in the leading indicators index and the Philly Fed may serve as the catalysts to breach the 117.50, especially in the event of deeper declines in U.S. equities. Subsequent support stands at 117.15 and 116.90. Upside capped at 118.45.
Euro to fare better than sterling
Despite the decline in sterling vs. the U.S. dollar, towards the $2.0 level, we see euro faring better as it lacks the burden of high yielding carry currently being assaulted by the turn in market sentiment. Germany’s five economic institutes raised their forecasts for 2007 GDP growth to 2.4% from the initial 1.4%, assuming two more European Central Bank (ECB) rate hikes to 4% by mid 2007. EUR/USD seen regaining the 1.36 figure, with the 1.3630 target deemed plausible in the event of disappointing U.S. figures. Key objective stands at 1.3660. Support stands at 1.3580 and 1.3550. The rebound in EUR/GBP to 0.6797 from 0.6774 is also boosting overall euro sentiment
Sterling struggles above $2.0
We expect GBP/USD to extend its retreat towards 1.9980 and 1.9940 in the event of further deterioration of market sentiment. But the pair is expected to regain some strength to exploit negative U.S. data ahead. The current declines in sterling are largely a result of a general paring down of high yielding carry plays and not a reflection of altered assessment on UK fundamentals. Recovery seen extending to 2.0040, but capped at 2.0070.
USD/CAD breaks to fresh five-month lows on CPI
USD/CAD broke below the 1.1267 trend line support (holding for 11 months) to 1.1233 after Canada’s headline CPI rose 2.3% y/y last month from February’s 2.0%, beating expectations of a 2.0% figure, while the core CPI remained rose 2.3% from 2.4%. The 2.3% core CPI is deemed higher than the Bank of Canada’s comfort level, but may not necessarily spur a rate hike considering the current appreciation in the loonie.
Support stands at 1.1220, followed by 1.1170. Preliminary resistance seen at 1.1270 followed by 1.1320. Today’s gasoline inventories data will also be key in the event of a higher than expected build in supplies. Key obstacle stands at 1.1345.
Ashraf Laidi
Chief FX Analyst
CMC Markets US
140 Broadway, 30th Floor
New York, NY 10005
(212) 644-4220
a.laidi@cmcmarkets.com
