The 4.0% revision in Q2 GDP was largely a result of higher net exports and inventories. Personal consumption was revised to 1.4% from 1.3% but well below 3.7% in Q1. Markets will pay attention to the more current data item from the job market, where the rise in weekly jobless claims, 9,000, to 334,000 was well above expectations (320,000), pushing the 4-week average to 324,500 and suggesting that the series are finally heading in the direction of the monthly payrolls. Evidence of a slowing labor market is now expected to make its way through the unemployment rate. A 4.7% reading in the August non-farm payroll report is a possibility after the July rate stood at 4.647%.
High yielding currencies come under renewed pressure while the yen edges up quietly as global equities seem unable to follow through on Wednesday’s rallies. Lehman Brothers lowered its earnings estimate for U.S. brokerages, causing U.S. equity futures to push lower. Yesterday’s broad gains were the latest recurrence in the past two months of advancing equities in days of little or no significant data releases. It has become increasingly seldom to see equity indexes post gains at times of macro economic releases, while days with at least one or two economic releases have prevailed through declines in equities, or profit-taking later in the trading session. Even in mid to late Q2, it was a common occurrence for U.S. stocks to rally on Mondays, days with not only no economic data but also merger and acquisition announcements.
At 10 am, the Office of Federal Housing Enterprise Oversight releases its House Price Index for Q1 expected to be flat after 0.5% and 1.3% in Q1 and Q2 respectively.
Yen to maintain dominance Bank of Japan’s Mizuno, the only central bank policy board member to vote for rate hike this year, said the current credit crisis are reasons for why rates need to be lifted off their lows. Mizuno added that a Federal Reserve Board rate cut should not preclude the Bank of Japan from raising rates. USD/JPY benefited from yesterday’s Wall Street rallies to gain 150 points to 116 before running out of steam and retreating back towards the 115.50s. USD/JPY remains saddled by the clearly bearish pattern of forming lower highs, as each subsequent recovery in the pair since August 9th failed to retrace previous highs. This suggests that buying on the dips remains a common strategy for the yen, while carry trades are having a shorter shelf life. This will be especially the case as we expect further volatility even when the Fed is forced to ease.
Upside seen capped at 115.80, whole 116.20 should prove a challenging obstacle for the bulls. Renewed losses in Wall Street of more than 0.7% are likely to test the 115 figure. Key support stands at 114.60.
EUR/USD nears 100 day moving average
Euro drops below 1.36 amid mounting calls from European politicians and think tanks for the European Central Bank to keep rates unchanged next month. The Head of the European Parliament's Economic and Monetary Affairs Committee, Pervenche Beres, said today the ECB should hold off on raising rates next week and focus on restoring market confidence. We expect the ECB to hold off next week due to the uncertain economic impact from the credit turmoil and the potential of sharp advances in the euro in the event that the Federal Reserve cuts rates the following week. Our expectations that a 50-bp Fed easing this year would impose broad pressure on the U.S. dollar will provide support for the single currency at the 1.35 level, before extending gains towards the 1.38 figure by year-end. Support seen stabilizing at 1.3560, which is 38% retracement of the recovery from the 1.3360 low. Key support stands at 1.3520. Upside capped at 1.3660.
Sterling eyes $2.0 Aside from falling equities, sterling drops after the latest Confederation of British Industry retail survey showed weak consumer demand this summer limited retailers' ability to push up prices. A balance of 16% reported falling prices in the three months ending in August following 33% in May, while August sales volumes fell to 15% from July’s 18%. During the current environment of increasingly fragile carry trade conditions, sterling is especially vulnerable to weak economic data.
We expect sterling drop beyond the 100 day moving average of 2.0030, a break of which paves the way for $2.0 and $1.9980. A disappointing profit picture from U.S. Q2 GDP report may accelerate losses in equities and raise the potential for fresh cable losses. Upside capped at 2.0100, followed by 2.0130.
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
