The ADP estimate for August private payrolls slumped to 38,000 after plummeting to 48,000 in July from June’s 150,000. Recall that ADP’s estimate of the July decline in private payrolls correctly predicted the direction in the change of July non-farm payrolls, which fell to a five-month low of 92,000 from 126,000. The 38,000 figure suggests that any recovery from July 92,000 payrolls may be unlikely, which is a blow for the employment-driven support to the U.S. consumer, especially amid the recent increase in weekly jobless claims and expected rise in the unemployment rate.
After waging a broad rally in the Tuesday U.S. session, the dollar is back down against the yen, while steadying versus the euro, sterling and loonie, reflecting renewed concerns of tightening liquidity, whereby high yielding FX sustains renewed pressure. Persistently high short-term rates in the LIBOR and commercial paper market, a downgrade of European banks by Lehman Brothers and a warning to monitor credit market losses at Japan’s banks by the nation’s financial regulator are a stark reminder that risk aversion is the order of the day as liquidity remains scarce.
The 10 am release of pending home sales is expected to show a 2.0% decline in July after a 5.0% rise in June. The report is a leading indicator of home sales and is based on contract signing of residential sales and not necessarily actual transactions of sales.
The 2 pm release of the Federal Reserve Bank’s Beige Book will garner more interest than previous reports after Chairman Ben S. Bernanke said last week “we will pay particularly close attention to the timeliest indicators as well as information from our business and banking contacts around the country.” The last Beige Book prepared was for the July period indicated “economic activity continued to expand in June and early and July.”
The OECD downgraded its 2007 gross domestic product (GDP) growth forecast for the United States to 1.9% from 2.1% in light of the protracted weakness in U.S. housing and credit turmoil, while calling for need to consider an August rate cut. The OECD cut its projection for the Euro zone to 2.6% from 2.7%, while raising Canada’s 2007 GDP growth estimate to 2.7% from 2.5%.
USD/JPY remains capped by selling-on-the-dips
The four-hour chart in USD/JPY summarizes the lower highs pattern, underlining the bearish formation of the pair as traders continue to sell on the short-term rallies. Comments from Japan’s top financial regulator Yoshimi Watanabe stating that the nation’s banks will be monitored for credit losses Falling global equities on economic weakness from the credit market was a reminder for risk averse traders to pare down the pair’s climb to the 116.30s. The overnight high of 116.46 marks the top of the trendline resistance extending from the July 20 high through the August 9 high, suggesting that traders remain reluctant to extend gains beyond any notable technical level. Subsequent resistance stands at 117. The daily chart shows further downside to come, nearing 115.10.
EUR/USD capped at 1.3630
EUR/USD is under renewed pressure amid fresh risk aversion, still hovering around its 100-day moving average. The Euro zone’s services PMI slipped to 58.0 in August from 58.3 in July as Italian and French growth edged lower. Germany’s services index, however, rose to a 13-month high of 59.8 in August from 58.5 in July. Traders will look for a less upbeat language in this afternoon’s release of the Fed’s beige Book, which may support the pair towards the 1.36 figure. Tomorrow’s ISM services from the United States and Friday’s payrolls should help prevent risk aversion flows from dragging the pair below the 1.3530s. Upside capped at a 1.3630.
Cable eyes 2.0050
Despite apparent dollar losses from this morning’s dismal ADP forecast, we stick with our defensive stance on sterling as the combination of prolonged credit market worries and fading chances of a BoE tightening accumulate selling pressure on cable. UK’s services purchasing managers' index from the Chartered Institute of Purchasing and Supply came slowed to 57.6 in August from July’s 57.0 but just ahead of consensus forecasts of 56.5.
We expect renewed losses in U.S. equities place a cap on the high yielding sterling, with resistance standing at 2.0130. Expect interim support to be tested at 2.0070, followed by 2.0050.
Ashraf Laidi
Chief FX Analyst
CMC Markets US
a.laidi@cmcmarkets.com
