Renewed losses in U.S. and global equity markets are weighing anew on the carry trade, shoring up the yen versus yielding currencies, as more U.S. economic data are released in the week. But the yen’s gains this time are not being accompanied by the usual advances in the dollar versus European pairs after Germany’s IFO business sentiment survey slowed by less than expected. A 28-year high in Eurozone money supply growth in July (11.7%) also helped shore up the euro on expectations that the ECB will not abandon its tightening campaign.
The 9 am release of the S&P/Case Shiller Home Prices Index is expected to show further declines in its national and composite indices. Monday’s release of existing home sales showed a smaller than expected decline to 5.750 million in July from 5.756 million. More significantly, however, the months’ supply of homes rose to 9.2 months, its highest level since October 1991, from 9.0 months in June and 7.2 months a year earlier.
The 10 am release of consumer confidence is expected to show a plunge to 104 in August from July’s 112.6, capturing the bulk of the market sell-off in August, seen to have affected responses significantly. The silver lining of the Conference Board’s report may be the more optimistic take on the job market, where the percentage of respondent finding jobs to be “plentiful” rose in July, while the percentage of those finding jobs “hard to get” diminished. This balance could become less optimistic amid rising layoffs in the financial services industry.
The 2 pm release of the minutes from the August 7 FOMC meeting will present little value to the markets mainly because the inflation vigilance and relatively upbeat take of the statement was completely disregarded less than two weeks later after the Fed intervened with a cut in the discount rate, expressing concerns on liquidity and the impact on growth, without mentioning its one-year long emphasis on inflation.
USD/JPY pull back towards 200 day MA Yen rises across the board on a combination of sub-prime concerns and worries of an economic spillover to the U.S. overall economy. Although expectations of a Bank of Japan rate hike have been pushed to mid Q4, the currency continues to benefit from regular bout of carry trade unwinding resulting from renewed volatility or economic concerns in the U.S. One increasingly clear element about the Japanese currency is that the uptrend remains firmly cemented and recent profit taking has been a buying opportunity.
USD/JPY support stands at the 200 day MA of 115.10, followed by 114.90 and 114.40 serving as a possible target for the New York session in the event of further losses in equities. Upside capped at 115.50, followed by 115.70.
GBP/JPY targets 230 followed by 229, with upside largely limited at 233.45. EUR/USD supported by IFO, M3 Euro regained composure after Germany ’s IFO business index fell to 105.8 in August from 106.4 in July, declining by less than the expected 105.3. The current assessment index rose unexpectedly to 111.5 from 111.3. IFO economists stated that the European Central Bank (ECB) must refrain from raising rates while demanding the Fed to cut rates.
Also supporting the currency was an unexpectedly strong 11.7% year on year increase in July M3, the highest since July 1979. The 3-month average rose to 11.1 from 10.6%. The report supports the argument for further tightening, especially as the ECB had stated that ongoing strength in monetary aggregates would keep inflation above 2.0%.
1.3720 remains the target to break for EUR/USD. Support stands at 1.3640, followed by 1.36.
Sterling capped at 2.0150 Cable rallied mainly on the back of the rise in EUR/USD, shrugging data showing a retreat in home purchases and mortgage lending. We continue to see 2.0150 as a short-term obstacle as long as carry trades remain under pressure. A breach of 2.0150 is seen capped at 2.0190. Support starts at 2.070, followed by 2.020.
Ashraf Laidi Chief FX Analyst CMC Markets US 140 Broadway, 30th Floor New York, NY 10005 Direct: 646.871.6809 Cell: 646.639.6825 Genl: 212.644.4220 Fax: 212.644.4222 Email: a.laidi@cmcmarkets.com
