The euro retreated across the board as London traders returned from their long weekend, dragging the pair back to its preliminary support of 1.3550. This was helped by the 0.1% decline in March German industrial production, after a 0.4% rise in February, which was revised from a 0.9% gain. The only notable comments from Euro zone ministers that were euro negative were from Slovenia’s finance minister indicating there’s a always a concern about euro FX moves, and his Dutch counterpart saying there are no inflation pressures in the Euro zone at this point.
Although we anticipate Wednesday’s FOMC decision to be dollar negative --due to a possible easing in the Fed’s hawkishness--currency speculators are unwilling to accumulate fresh euro longs unless the FOMC statement presents them with cogent reasons to do so. Net euro longs had risen to three consecutive weekly record highs, reaching 111,282 contracts in the week ending April 24, before retreating to 106,688 contracts last week.
Thursday’s ECB decision is expected to maintain rates unchanged at 3.75%, keeping the door open for further rate hikes starting in June. Although last month’s April press conference did not include the term “vigilance” pertaining to inflationary pressures, trades pushed up the euro across the board on expectations that the central bank will stick to its once-per-quarter incremental rate hikes. Thus, the ECB will likely express inflation vigilance and allow for the possibility of a June tightening. We expect the ECB to make two 25-basis point rate hikes to 4.25%.
A breach of the 1.3545-50 support clears the way for prolonged selling to as low as 1.3480. But we do expect the Fed’s language to trigger renewed buying and call up the preliminary resistance of 1.3620, onto 1.3650.
Aussie unable to break 83 after budget and retail sales Australia’s 2007-08 budget showed a surplus of $10.6 billion Australian dollars, unveiling A$31.5 billion in income tax cuts over the next four years. The budget comes less than one week after Reserve Bank of Australia lowered its underlying inflation forecast from 2.7% to 2.4%, offering sufficient slack to increase boost spending to the Costello Budget.
The budget announcement coupled with stronger than expected 1.1% March increase in retail sales, lifted the Aussie towards the 83¢ figure, before seeing a retreat back to the 82.80s. Some traders reasoned that the generous budget might well provoke the RBA into reiterating its hawkish threats later in the year. Yet we reiterate our call for Aussie rates remaining unchanged at 6.25% despite the tightness in the labor market.
Wednesday will prove a busy day for the Aussie, with the Fed decision at 2:15 pm EST and the widely anticipated Australian jobs report at 9:30 pm EST. The April unemployment rate is expected to match its 31-year low of 4.5%, while net jobs created are seen rising to 12.5,000 from 10.5%. A combination of a dovish Fed statement and strong jobs report could provide the pair with considerable boost towards the 83.40-45 resistance. Interim pressure point stands at 83.10. Support is seen cemented at 82.40.
USD/JPY pullback underway
We expect USD/JPY to extend its gradual pullback towards 119.45 as the technical backdrop in the pair suggests further correction. Although the prolonged reduction in risk appetite and equity market has helped fuel the dollar/yen rate, we expect the Fed factor to weigh on the greenback as traders further remove dollar longs generated throughout the prior week. Interim support stands at the 100-day moving average of 119.20. A rebound towards 119.70, is seen capped at 120, until trading activity is expected to cool ahead of the Fed decision.
Separately, China's central will raise the amount of foreign currencies required to be held at banks, to 5% of FX deposits from 4%. The news was leaked by a source having access to the central bank’s memo to commercial banks. While the PBOC refused to comment, such a measure is consistent with the central bank’s measures to rein in liquidity as well as to shore up FX holdings at local banks to stabilize upward pressure on the yuan.
Ashraf Laidi
Chief FX Analyst
CMC Markets US
140 Broadway, 30th Floor
New York, NY 10005
(212) 644-4220
a.laidi@cmcmarkets.com
