High yielding currencies are rallying across the board at the expense of the Japanese currency as risk averseness wanes on optimism that Federal Reserve Board Chairman Ben Bernanke’s much anticipated speech will reaffirm the Fed will take the necessary measures to ensure stability in the system. Whether Mr. Bernanke will go so far as to clarify the Fed’s intentions between stabilizing financial market stability (via liquidity injections and discount rate cut) and shoring up the economy (via fed funds rate cut) may not be certain or even matter for the markets at this point. We expect Mr. Bernanke to reiterate the central bank’s duties towards ensuring stability and reaffirming its position without guaranteeing a September rate cut or ruling one out. As long as financial markets obtain a sense of the Fed’s willingness to intervene, we could see extended dollar weakness against all major currencies with the exception of the yen as risk appetite returns to the market. Thus, an admission of further weakness to come by Bernanke may not be necessarily negative for U.S. equities.
But before Bernanke’s 10 am speech, markets will keep a vigilant eye on the 8.30 am release of the personal spending/income and core PCE price index figures for June. Personal consumption is seen recovering 0.4% after a 0.1% increase while incomes are seen up 0.3% from 0.4%. The Fed’s inflation gauge of core PCE price index is seen up 0.2% month-to-month from 0.1%, while the year on year rate is seen remaining at 1.9%. A figure above 1.9% is expected to be received negatively by markets, which tends to be negative for USD/JPY, USD/CHF and neutral to negative for EUR/USD, GBP/USD, EUR/JPY, AUD/USD and NZD/USD. USD/CAD will partly depend on the GDP figures also due at 8.30 am.
Also at 8.30 am is Canada ’s June and Q2 GDP, expected up 0.1% in June from 0.3%., while the Q2 GDP is seen rising 2.8% annually from 3.7%.
The 9.45 am release of Chicago PMI is expected to show a drop to 52.8 in August from 53.4.
At 10 am, July factory orders are seen up 0.7% from 0.6%.
Also at 10 am, is the final August reading on the University of Michigan consumer sentiment seen at 82.7 from 83.3.
Yen drops on Bush’ plan, pre-Bernanke optimism Aside from market optimism that the Fed will intervene to ensure stability and confidence in credit markets, the yen is also falling after comments from pres Bush announcing a plan to guarantee loans for delinquent mortgage borrowers and help them avoid foreclosure. Several candidates for next year’s presidential elections are starting to suggest their own plans for assisting struggling homeowners. As the number of delinquencies is expected to rise into next year, the broader outcome is seen to weigh on the general U.S. economy and support our calls for continued dollar weakness in the long term. We expect the current gains in USD/JPY to dissipate at 116.60 as Mr. Bernanke will balance the downside risks while reiterating the readiness to stabilize the financial system. Support starts at 116, followed by 115.60. Key resistance stands at 116.90.
USD/JPY hovers just around 116, which is the level we predicted for August 31 on July 31st when the pair hovered above 119.
EUR/USD breaks above1.37 on falling risk
Despite data showing weaker consumer and business sentiment in the Eurozone, euro extends gains to over half a cent amid reduced risk averseness ahead of President Bush’s announcement to bail out struggling homeowners. A core PCE price index figure below 2.0% will is apt to call up the 1.3730 resistance, followed by 1.3750. Note that euro longs vs. the USD in the IMM have dropped by 40% last week, reaching their lowest level in October. We deem such a decline in euro longs to be excessive considering the ongoing fundamental weighing on the U.S. dollar. EUR/USD support is seen at 1.3660, followed by 1.3630.
USD/CAD decline may stabilize on GDP Renewed losses in USD/CAD are a reflection of prolonged risk appetite, but the upcoming GDP data may stabilize USD/CAD at the 1.05 figure if Canada’s Q2 GDP drops to below 2.9% from 3.7%. This would affirm fears that the U.S. slowdown may have started to filter its way north of the border to the extent of limiting the Bank of Canada’s tightening. Upside faces interim resistance at the 1.0560 trend line, followed by 1.06. A steady GDP report combined with an assuring speech from Mr. Bernanke is seen extending losses towards 1.0480.
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
