The NY Fed’s Empire manufacturing index slowed to a 26.5 in July from June’s 12-month high of 25.8. The new orders index remains strong, surging to 26.5 from 25.8 while the employment index jumped to 11.4 from 3.4. The report helps the dollar stabilize from its multi-year lows, but the risks of further negative U.S. data remains amidst the barrage of key reports later this week.
Dollar weakness becomes increasingly pervasive as the yen further drags the U.S. currency despite a return to risk appetite in global equities, which underlines the broadening weakness in the greenback. Meanwhile, the euro retests last week’s all time highs against the dollar, while sterling surges to fresh 26-year highs at $2.0396. Both the Aussie and Kiwi are at their cycle highs (18 and 22 years), while the Canadian dollar soars to fresh 30-year highs. The 0.9% decline in U.S. June retail sales was the biggest since August 2005, which raises doubts about a consumer-led recovery in the second quarter.
This week’s data and events will prove vital for the fate of the declining dollar, with PPI, CPI, U.S. home starts/building permits, gross domestic product (GDP) and Federal Reserve Chairman Ben S. Bernanke’s semi-annual testimony to Congress. Although Federal Reserve officials usually refrain from commenting on the U.S. dollar, Bernanke’s testimony will likely provide the usual inflation vigilance as an indirect support for the U.S. currency.
Germany’s ZEW survey is due Tuesday morning, while the BoE minutes of this month’s interest rate hike decision and second quarter GDP figures are due from the United Kingdom on Wednesday and Friday respectively.
Yen strength endangers dollar slide We pointed out late last week the yen’s modest declines versus the dollar in the face of the equity rallies seen in Thursday Friday. Despite Thursday’s sharp gains in U.S. equities (biggest one-day gain in the Dow in five years), the rebound in USD/JPY was a mere 0.4%, which was unlike the usual cases of U.S. equity rallies that were accompanied by 0.9%-1.2% gains in USD/JPY.
Today’s sell-off in USD/JPY is partly a result of overall yen strength and partly a reflection of weak dollar story emerging as the underlying theme in FX markets. The pair faces key support at 121.50, a break of which clears the way for 121.00. This morning’s U.S. figures
EUR/USD cautious ahead of ZEW, Bernanke Euro zone June CPI was confirmed at 1.9% y/y, coming in below the 2% mark for the 10th consecutive month straight month. But the latest remarks from European Central Bank (ECB) officials continue to warn of the inflationary dangers of rising oil prices, which fits in with their support for the anti-inflationary virtues of a strong euro.
Despite a retreat in EUR/JPY and EUR/GBP as well as the stronger than expected U.S. figures, EUR/USD faces the 1.38 figure onto the 1.3820 target. But euro bulls are likely to temper their enthusiasm ahead of tomorrow’s ZEW survey and Wednesday’s Bernanke testimony. Bernanke’s speech will coincide with the release of the CPI report, expected to show further declines in its core figure. But the effect of such a decline may be expected to be short-lived as Bernanke reiterates the risk of rising food prices and the importance of the headline figure.
Support stands at 1.3770, followed by 1.3740. We expect any gains today to remain capped at 1.3820.
Aussie & Kiwi hit fresh 18- and 22-year highs New Zealand’s second quarter CPI came in at a higher than expected 1.0% and 1.8% increase q/q and y/y respectively, thus shoring up odds of further tightening in the 8.00% cash rate. The news lifted Kiwi to 0.7931 and Aussie to 0.8762 as traders were propped by the greenback’s broadening weakness. Although the odds of an RBA rate hike remain below 50%, the pair remains supported by rising commodity prices and U.S. weakness. The threat to the AUD and NZD remains primarily a source of an unwinding in carry trades emerging from sharp sell-offs in equities and renewed fears of U.S. sub-prime fallout. The impact of such event is seen more of a negative on the Kiwi, which makes the pair less favorable against CAD, EUR and JPY.
Ashraf Laidi Chief FX Analyst CMC Markets US 140 Broadway, 30th Floor New York, NY 10005(212) 644-4220 a.laidi@cmcmarkets.com
