The impact of reduced global risk appetite on foreign exchange markets continues to weigh, particularly as the retreat in global equities take the luster off high-yielding currencies. The exception, however, remains to be in the yen pairs, as the Japanese currency sustains renewed negative pressure after North Korea test-fired several missiles towards the Sea of Japan in what it claimed was part of a military exercise. The news was the catalyst for the yen’s pullback after the currency had initially rallied to a seven-day high in early Tokyo trade when Asian bourses dropped across the board following the Thursday sell-off in Wall Street.
While the reported explanation to the Wall Street sell-off consisted of reduced chances of a Fed cut following the 16% increase in U.S. new home sales, the sell-off was widely expected after the indexes’ failure to follow up on their intraday highs earlier in the week. We think it is too early to draw conclusions about the stabilization of the U.S. housing market from new home sales because these figures are based on signed agreements rather than sales closings, as in the case of existing home sales. New home sales do not take cancellations into consideration.
Today’s 10 am EST release of U.S. existing home sales is expected to show a slight drop to 6.10 million units from 6.12 million units. An actual increase would provide the a significant boost to the U.S. dollar, as it will help defuse the negative evidence seen in last week’s release of the home price index, pending home sales and building permits.
Since yesterday’s strong new-home sales weighed on U.S. stocks on the rationale that they would reduce the likelihood of a Fed easing, does a decline in existing home sales today imply a rally in U.S. stocks? We do not expect U.S. equities to be in a position to sustain any notable rebounds especially ahead of a long weekend. Disappointing existing home sales are more likely to weigh on stocks on the rationale that trend in housing has not yet bottomed, which raises risks to the US consumer.
The combination of a potential retreat in high yielding currencies from continued stock market sell-offs and the prospects of an upside surprise in US data validates our negative stance on high yielding currencies such as the sterling, New Zealand dollar and Australian dollar. Thus, either alternative, the outlook for these currencies is neutral at best.
Euro’s rebound seen delayed
The euro’s recovery potential in the short-term remains questionable even in the case of data disappointment in the U.S. figures, as traders are seen further unwinding the record net longs reported last week. With the bias remaining on the negative side, interim support remains at 1.3420 followed by 1.3390 and 1.3370. We expect buying potential to return next week ahead of a barrage of U.S. figures, including the payrolls, ISM and final first quarter GDP. Upside is capped at 1.3470 and 1.35.
Sterling bias remains negative UK first quarter GDP growth remained unrevised at 0.7% q/q and 2.9% y/y, with private consumption unchanged at 0.6%. The combination of a potential retreat in high yielding currencies from a stock market sell-off and the prospects of an upside surprise in US data validates our negative stance on high yielding currencies such as the sterling.
Interim support stands at 1.9830, followed by 1.98 and 1.9785. Upside seen capped at 1.9870, with potential peaking at 1.988.
Yen weakened by Korea’s exercise
The main factor weighing on the yen is the news from North Korea’s ballistic missile exercises, which lifted USD/JPY from 121.20 to 121.75. Interestingly, the yen rose across the board despite the latest CPI figures showing inflation down for three consecutive months. April core CPI fell 0.1%.
The failure in the U.S.-China SED talks on reaching any resolution to cut China’s trade deficit will not be an acceptable outcome to the U.S. Congress, which will only raise protectionist pressure from Capital Hill. Beijing will likely stick to its policy of periodic strengthening in its currency, which has hit post revaluation highs for the last three sessions.
The latest developments from North Korea and reduced chances of a BoJ hike before the end of summer are a vital source of downward pressure but the looming risk from global equities is expected to slow the pace of advances. Upside remains capped at 121.80. Interim support levels start at 121.20, followed by 120.80.
NZD/USD remains pressured
We retain our bearish stance on the New Zealand dollar ahead of escalating risks for a downturn in global equities. The pair has dropped from 0.7285 to 0.7245 before stabilizing at 0.7255. The prospects of an upside surprise in U.S. data combined with the ongoing downside risks in equities, leaves a cap on the pair, with interim support at 0.7240 followed by 0.7215. Upside capped at 0.7270.
Ashraf Laidi Chief FX Analyst CMC Markets US 140 Broadway, 30th Floor New York, NY (212) 644-4220a.laidi@cmcmarkets.com
