More selling hits the U.S. dollar during the Asian session as the currency dropped to all-time lows against the euro, and new 26-year lows against the sterling and 18-year lows against the Aussie. Selling in USD/JPY takes the pair to a new two-month low at 120.38 despite the gains posted in U.S. and Asian equities, thereby highlighting the U.S. specific concerns saddling the U.S. dollar.
But both the euro and sterling retreated later during the European session on weaker than expected manufacturing data. The lack of major economic U.S. figures today will give way to speeches from Federal Reserve officials (Mishkin 9 am & Poole 5:30 pm) and U.S. corporate earnings. We have already seen an established pattern whereby U.S. equities rally during the lack of U.S. data, which gives a stabilizing impetus to USD/JPY. The exception to such days has been instances of negative subprime news, such as downgrades from S&P and Moody’s.
USD/JPY bear remains in place The latest sell-off in USD/JPY is in line with our yen chart sent yesterday, where we mentioned the bear remains in charge despite interim gains. The break below the 38% Fibonacci at 120.75 gave way to a two-month low at 120.38, which is the 100-day moving average. All eyes are now on the next major target of 119.60, which marks the 200-day moving average as well as the 50% retracement of the rise from 115.14 to 124.12. This suggests that the next attack on the pair will make 119.60 as the next goal. Interim support stands at 121.15. Upside capped at 121.00, followed by 121.30.
The fact that USD/JPY selling has recently started to take part during the Japanese session, suggests that Japanese officials are less reluctant to see a boost in the currency. In previous months, bouts of yen buying resulting from strong Japanese fundamentals were short lived.
Despite the falling popularity of Japanese Prime Minister Abe ahead of this weekend’s Upper House elections, the opposition parties are not expected to beat coalition of Abe’s Liberal Democratic Party and the New Komei Party. Even if the coalition fails to win the required 64 seats, Abe would be expected to remain in office because the ruling coalition has a more solid hold in the more important Lower House of Parliament.
EUR/USD pauses for breathEuro retreats after the preliminary readings for services and manufacturing PMIs both declined in July to 58.1 from 58.3, and to 54.8 from 55.6. But the week’s major release will be the closely watched German IFO survey on business sentiment due Thursday, expected to show a modest slowdown (climate survey seen down to 106.4 from 107.0 and expectations to 102 from 102.8).
This week’s U.S. housing sales figures will act as the major drive for the pair, with both new and existing home sales expected to have dropped last month. New revelations related to the subprime sector are seen as the main catalyst for lifting the pair past the 1.3850. Subsequent resistance stands at 1.3880. We expect today’s data free session to guide the pair towards 1.3790 followed by 1.3770.
Cable eases on slowing data Sterling drops from its 26-year highs to $2.0615 of $.2.0650 after the Confederation of British Industry reported a drop in its new orders index to -6 in July from +8 in June, well below +6 consensus forecast. The output production balance slowed to +10 pct from +25, well over forecasts of 21. But the current recovery in GBP/JPY from 248.50 to 249.22 and the continued downward pressure on EUR/GBP suggests limited losses in cable, which gives way to interim target at 2.0645. Support stands at 2.06, backed by 2.0580, which is the two-week trendline support.
Loonie awaits retail sales CAD awaits Canada’s retail sales, expected at 0.5% in May from 0.4% and core sales up 0.5% from 0%. A strong report should open the door for another rate hike, which is likely to drag USD/CAD below the 1.04 towards 1.0380. But the current weakness in crude oil may accelerate CAD losses in the event of disappointing sales figures, especially if light sweet crude oil breaks below the $73 figure, following yesterday’s 90¢ decline.
Nonetheless, with negative USD sentiment unlikely to abate soon and expectations of another BoC rate hike above 50% despite the loonie’s gains is likely to cap USD/CAD at 1.0490. Key resistance stands at 1.0520.
Aussie boosted ahead of this evening’s CPI The Aussie hit a fresh 18-year high at 88.60 in early Asian trade before settling around the 88.40s. All eyes are on Wednesday’s release of second quarter CPI (due Tuesday 9.30 pm EST), which came in higher than the 1.0% forecast following 0.1% in Q4. The data may not be sufficient in prompting the RBA into a tightening, but may add to Aussie bids exploiting USD weakness.
Upside capped at 88.65, followed by 88.80. We are unlikely to see the pair drop below 88.30 in U.S. trade ahead of the CPI. Key support is seen firm at 88¢. The combination of weak CPI (below 0.5%) and upside surprise in Wednesday’s release of U.S. existing home sales may lead to a top in the pair and call up 87.70.
Ashraf Laidi Chief FX Analyst CMC Markets US 140 Broadway, 30th Floor New York, NY 10005 (212) 644-4220a.laidi@cmcmarkets.com
