U.S. weekly jobless claims continue lower, showing an 8,000 drop to 201,000, with the four-week moving average slowing dropping to 312,000. We expect the data to extend moderate selling in sterling and yen vs. the dollar.
Renewed talk of an imminent Chinese rate hike after China’s second quarter gross domestic product GDP grew of 11.9% — the highest in 12 years, surpassing all forecasts. June CPI inflation jumped to a three-year high of 4.4% year-over-year from May’s 3.4%, well over the central bank’s 3.0% target. Unlike in March and April when global markets appetite exhibited rising sensitivity to a further slide in Chinese equities emerging from higher interest rates, markets today have kept such risks at bay on the reasoning that China’s stock market capitalization is no more than 1% of the nation’s economy, thus having a minimal impact on China’s economy and the rest of the world. Nonetheless, the role of global market contagion must not be ignored in the event that a market sell-off occurs simultaneously with renewed subprime revelations in the United States.
At 10 am EST, Federal Reserve Bank Chairman Ben S. Bernanke will give the same testimony to U.S. Senate as he did yesterday to the House, but the range of questions could differ as he may be prodded more on future interest rates and inflation. Yesterday’s release of June inflation figures showed no change from the May report, with headline and core CPI at 2.7% and 2.2% y/y respectively, highlighting lingering upside price risks on the headline level.
Also at 10 am EST, is the U.S. index of leading economic indicators expected to have fallen 0.1% in June from a 0.3% rise in July.
At noon is the July survey from the Philadelphia Fed expected to have eased to 15 after the June figure jumped to 18 from May’s 4.2. Markets will closely watch the employment and new orders indices, which fell to 5.6 from 12.9 and rose to 18.3 from 8.7 respectively.
The 2 pm release of the minutes from month’s FOMC meeting should shed more light on the Committee’s decision to downgrade core inflation to “stabilize” from “elevated” in the Federal Open Market Committee (FOMC) policy statement, despite deeming upside risks from high resource utilization and rising energy prices.
USD/JPY regains 122 despite China overheating, eyes 122.30
USD/JPY has proven to counter any downward pressure emerging from the possibility of a Chinese rate hike as early as Friday, which may result into market nervousness and trigger yen-boosting appetite plays. Lehman Brothers’ denial that its earnings were affected by losses in subprime driven losses helped instill some stability in the currency. The pair was also boosted by an unexpected 0.3% decline in May All Industry index — the first drop in two months — and a 0.1% in the services sector index.
We do not foresee any notable declines in USD/JPY beyond the usual 121.70 support, which should leave the anticipated range intact at 121.85-90 - 122.20. Only unexpectedly strong U.S. figures are seen propping the pair above the 122.20 figure. Absent any new rumors or revelations is seen triggering gains to 122.20. Key resistance stands at 122.45.
Euro regains fresh all tine highs as rhetoric gains importance The euro stabilized at our projected support of 1.3750s before slowly regaining its $1.3830 record high after a spokesperson said French President Sarkozy has not demanded an end to the independence of the European Central Bank (ECB). Mr. Sarkozy has been a vocal in demanding measures to explore ways for collaboration between Euro politicians and the ECB on matters of the currency.
One of the elements that may lead to a possible retreat in the euro’s rally could emerge from a change in rhetoric by Euro zone politicians and ECB officials warning of future rapid moves in the currency, rather than expressing displeasure at recent moves. EU economic and monetary affairs commissioner Almunia said today the rising euro has yet to affect EU balance of trade but future strength is a concern and must closely watch for future euro appreciation.
The two-hour chart shows minor support at 1.3805, backed by a longer trendline support at 1.3780, holding since June 28. Stability at this point is seen reviving the rally, targeting 1.3830, where options barriers are said to be present. Key barrier follows at 1.3865-70.
Sterling cools on retail sales, eyes $2.0430 Cable dropped below the $2.05 figure after UK retail sales slowed to a 0.2% rise in June from 0.4%, figure, below the expected 0.3%. With yesterday’s release of the Bank of England minutes at showing a contentious six-to-three vote for the 25-basis point rate hike, sterling is expected to become more vulnerable to short-term selling on doubts that the Bank of England (BoE) may need to remain on hold before considering further tightening.
We expect cable to approach the 2.0450 and stabilize at the 2.0430 trend support holding since Jul 6. Key foundation stands at $2.04. A decision from the People’s bank of China (PBOC) to raise rates on Friday may tackle risk appetite and drag high yielding currencies such as sterling.
This outlook leads us to consider bearish positions in GBP/CAD (2.15460) and GBP/JPY (249.45).
Ashraf Laidi
Chief FX Analyst
CMC Markets US
140 Broadway, 30th Floor
New York, NY 10005
(212) 644-4220
a.laidi@cmcmarkets.com
