The dollar’s latest decline must now become a matter of consideration for the U.S. Treasury and the central bank, as the currency’s trade weighted index (as measured against six currencies) has now fallen below the 80.40 level, reaching its lowest level since 1992. Previously, the yen’s continued weakening had acted as a major stabilizer of the dollar’s overall value at a time when the U.S. currency hit all-time lows against the euro and multi-decade lows against the Aussie, Canadian dollar, sterling and New Zealand dollar.
But as the periodic revelations of subprime troubles (manifested in downgrades of subprime-backed debt, deteriorating market values of subprime related funds and declining stock prices of subprime lenders) boost the yen on falling risk appetite, the dollar’s decline becomes increasingly pervasive.
More specifically, unlike in the events of late February and early March when the unwinding of the carry trades a manifested itself in a broad yen rally, today’s market events are translating into broad dollar declines because the market and economic implications of the ensuing subprime fallout are largely U.S. specific. Such implications increase the likelihood of an interventionist rate cut from the Fed aimed at shoring up market liquidity, as risk appetite may risk deepening further.
Meanwhile the dollar’s deteriorating sentiment has contributed to a $20 rally in the price of gold, reaching two-and-a-half-month highs at $687 per ounce. We reiterate our expectations for $720 gold before the end of September. This week’s key U.S. data will include June existing home sales on Wednesday, new home sales on Thursday and the advanced second quarter gross domestic product (GDP) on Friday. Canada’s July retail sales are due Tuesday, while Germany’s July IFO survey on business sentiment is due on Thursday. Euro zone May manufacturing and services PMI are due Tuesday, while Australia’s second quarter CPI is due Tuesday evening.
USD/JPY capped at 122.10, medium bear in place With the pattern of lower highs extending on a weekly basis in USD/JPY underpinned by a combination of risk appetite reduction and overall dollar damage, selling on the technical highs remains the order of the past two weeks. The daily chart on the left shows that any interim rebound is likely to encounter preliminary resistance at 121.45, followed by considerable resistance at the two-week trend line resistance of 122.10, which is also presented by the 38% retracement of the 124.10-120.85 decline.
The weekly chart shows the beginning of the fifth-straight weekly decline, facing interim support at 120.65—the 23.6% retracement of the 109.18-124.10 rally. Subsequent support stands at 120.00.
The U.S. Monday session will be devoid of economic thus may lead to preliminary bottom fishing, but traders must be alerted from fading rally towards the end of the trading session, as markets stand cautious ahead of Tuesday’s U.S. existing home sales report.
EUR/USD pauses for breath
EUR/USD is seen pausing for breath, retreating towards the 1.38100, followed by three-week trendline support at 1.3790. The gradual escalation of concerns by European authorities will likely serve in calling up the offers at 1.38 and 1.3770 but the rapid pace at which we have see the subsequent rebounds paves the way for 1.42 by end of September. Interim resistance at 1.3880.
Aussie bolstered by PPI Aussie pushes higher above the 88-cent figure after Australia’s second quarter PPI grew by 1.0% q/q versus expectations of 0.8%, and 2.3% y/y versus expectations of 2.0%. The report prompts expectations that Wednesday’s release of second quarter CPI (due Tuesday 9:30 pm EST) could come in higher than the 1.0% forecast following 0.1% in the fourth quarter. The data may not be sufficient in prompting the Reserve Bank of Australia into a tightening, but may add to Aussie bids exploiting USD weakness. This may push Aussie to test the 88.25 resistance into a fresh 18-year high of 88.40. A CPI figure in line with expectations or less may drag Aussie towards 87.80, backed by 87.70. Nonetheless, any resulting selling is likely to intensify against CAD and GBP.
Ashraf Laidi Chief FX Analyst CMC Markets US 140 Broadway, 30th Floor New York, NY
(212) 644-4220
a.laidi@cmcmarkets.com
