Unwinding of carry trades is hitting the markets rather than then broad dollar selling as the yen rallies across the board on emerging credit concerns in global credit markets. U.S. durable goods grew by a weaker than expected 1.4% in June, while orders excluding transportation fell 0.5%. Weekly jobless claims fell by 2,000 to 301,000. This is not a story of broad dollar weakness but a manifestation of a sharp reduction in global risk appetite emerging from worldwide concerns with hedge fund losses. Weaker than expected home price data from the United Kingdom and a signaling of the end of the Reserve Bank of New Zealand rate hikes is punishing high yielding currencies and favoring the Japanese yen.
This morning’s U.S. new home sales are expected to have dropped 2.7% to 890,000 last month from 915,000 in May, a 17% decline on a year-on-year basis. Yesterday’s release of U.S. June existing home sales dropped 3.8% in June to 5.75 million, the lowest level since March 2003. The year on year decline of 11.4% was the biggest decline since April 1995.
USD/JPY plummets towards key support The rebound in USD/JPY proved short-lived as the pair slides by more than a 100 points towards the major support of 119.60, which is the 100-day moving average as well as the 50% retracement of the rise from 115.14 to 124.12. The current market moves are predominantly a manifestation of overall decline in risk, which is boosting the Japanese currency across the board. Renewed weakness in U.S. data, i.e. new home sales paves the way for 119, below which the 118.50 is the only clear technical foundation in sight. But the pair may extend towards 120.20 in the event of an upside surprise in the U.S. data.
Kiwi leads high yielders down - RBNZ signals end of tightening
Kiwi plummets by more than a full cent despite the RBNZ’s decision to raise interest rates by 25 bps to 8.25%. Although we were mistaken in yesterday’s note in expecting no rate hike from the RBNZ, the Kiwi did lose ground from 80.3¢ to 79.20¢ after the central bank signaled to markets the end of its tightening campaign, which included four rate hikes this year. Our rationale for expecting a sell-off in the Kiwi was based on falling CPI (annual second quarter CPI slowed to 2.0% from 2.5% in Q1 and 2.6% in Q4, falling well within the RBNZ’s inflation target range of 1-3%), a 17% rise in the Kiwi year to date and the yet to be completed pass-through effect of the prior 75-basis point rate hikes so far this year.
The best performing currency in the industrialized world is now under threat to sustain further damage as investors extend their exodus from carry trades amid a combination of deteriorating credit conditions in global capital markets and the end of the RBNZ rate hikes. Kiwi eyes support at 79¢, followed by 78.80¢. Key foundation stands at 78.60¢, which is the 385 retracement of the low from mid June to last week’s 22-year high. A weak showing in U.S. new home sales is expected to sustain downward pressure on the NZD, with upside capped at 79.40¢.
Euro’s declines are limited by USD weakness
The euro sustained brief losses after Germany ’s IFO business climate indicator eased to 106.4 in July from June’s 107 in June, less than expectations of 106.5. The IFO’s current assessment slipped to 111.3 from 111.4, while the economic expectations index fell to 101.8 from 102.8. But the acceleration in Euro zone money supply to 10.9% from 10.6% helped the euro stabilize losses.
The fate of the euro’s decline rests on this morning’s U.S. new home sales figures. A decline of more than 3% would refocus attention on the USD woes and help the euro stabilize atop the 1.37 foundation. But an unexpected increase in home sales or a decline of less than 1% may extend euro losses towards the 1.37 figure and onto the six-week trend line support of 1.3690. This is followed by 1.3660. Upside capped at 1.3770.
Cable extends to our $2.0440 target
Cable extends losses to the $2.0440 level foreseen in yesterday’s morning note after UK house prices rose at an annual rate of 9.9% in July, well below the expected 10.6% increase. The figure not only raises doubts about a continuation of the Bank of England’s tightening campaign but also places the high yielding sterling at risk of influencing its high yield counterparts (AUD, NZD, CAD). This is also seen in the ensuing damage in GBPJPY, which is reaching six week lows at 244.
Cable eyes support at 2.04, followed by 2.0350 as a target for early next week. Upside capped at 2.0480.
Ashraf Laidi Chief FX Analyst CMC Markets US 140 Broadway, 30th Floor New York, NY 10005(212) 644-4220a.laidi@cmcmarkets.com
