As FX carry trades are gradually returning and equity markets head back higher, the sense of normalcy may weaken the argument for a Fed easing. But with chances of a funds rate cut next month standing above 80%, a decision to leave the funds rate unchanged is likely to trigger renewed market sell-off and force the Fed’s hand. More importantly, deteriorating macroeconomic evidence is likely to be the more compelling argument for two rate cuts this year. As more current economic indicators on consumer spending, housing and employment hit the wires after Labor Day weekend, these will likely subject markets to renewed pressure and trigger fresh weakness on USD/JPY. The major question is what would happen to the rest of the dollar pairs? Once U.S. macroeconomic concerns (weaker growth) take over from market concerns (market contagion), the dollar’s weakness will likely become broader in nature as the Fed reduces the dollar’s interest rate differential by cutting rates while the European Central bank, Bank of England and Bank of Canada maintain rates unchanged rather than raise interest rates.
This week’s key data on housing (Monday), preliminary Q2 GDP (Thursday), Chicago PMI (Thursday) and personal income and core PCE price index (Friday) will be crucial for FX and capital markets, while Fed Chairman Bernanke’s speech on housing this Friday should shed valuable light on the Chairman’s take on housing from that of benign apprehension to increased concern. Bernanke had already told Congress last month his estimates of the sub-prime crisis could reach as much as $100 billion.
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. Despite that yesterday’s housing numbers were above expectations, it is the 5 th consecutive monthly drop in the month on month series, a pattern not seen over the past 15 years.
USDJPY drops ahead of US home sales Falling U.S. home sales have proven to be consistently negative on USD/JPY, especially when U.S. equities reacted negatively. A decline of more than 0.9% in existing home sales along with expected profit taking in U.S. equities is apt to drag the pair towards the 115.50. An unexpected increase in home sales can boost USD/JPY to 116.50, followed by 116.80. The return of U.S. data to the forefront raises chances of destabilizing forces in USD/JPY, especially with housing figures shedding light on further deterioration in the sector.
Rallies beyond 117 remain corrective, with the major trend line resistance standing at 118, while selling on the highs remains the prevailing strategy. Short-term support stands at 115. EURUSD rally capped at 1.3720 The onset of further weakness in U.S. housing is to underpin the euro above the 1.3630s, but today’s IFO survey on German business sentiment may show further weakness, thus paring expectations of ECB tightening. The mix of US-Eurozone is to prevent the pair from breaching beyond the 1.3750 resistance this week. Key obstacle stands at 1.38. Support starts at 1.3620, backed by 1.3580. Key support stands at the 100 day MA of 1.3550
Sterling eyes 2.0130 Sterling ’s breach of the 2.0130 resistance makes way for the 2.02 figure, especially amid the absence of rebounding risk appetite and stabilizing equities. Signs of stabilizing home price inflation in the UK according to Rightmove may not stand in the way of cable’s short-term gains towards the 2.0230, especially in the event of renewed US home sales weakness. Only in the event where US stocks drop more than 0.8-0.9% in the session where sterling’s gains will be curtailed towards the 2.0110. Support stands at 2.0080.
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
