The dollar stabilizes from its worst levels reached during the Asian session when the currency traded at four-week lows at 112.60 yen and $1.3806 respectively. The 4,000 net loss in Friday’s non-farm payrolls has reinforced the shift FX markets emerging last week, whereby flows are increasingly driven by the U.S. Dollar rather than by risk appetite, as was the case in the preceding six weeks. This means that the dollar’s moves against the Japanese yen are becoming more in synch with its behavior against EUR, GBP, AUD and CAD as traders turn to the Federal Reserve to cut the currency’s interest rate differential by at least 50-bps this year
What used to be a question revolving on whether the Fed will cut interest rates at the September 18 meeting has become a question on the magnitude of the rate cut. We expect the Fed to make its first funds rate cut at the upcoming meeting with 25-basis points to 5.00%, along with a 50-bps rate cut in the discount rate cut to 5.25%. Neither economic data not resurging market turmoil in the next few days are likely to be sufficient to force the Fed’s hand before next Tuesday. Further date deterioration thereafter is expected to trigger a 25-bps Fed funds cut at the October and December meetings.
Aside from Friday’s U.S. reports on August retail sales and industrial production, the primary focus will fall on this week’s barrage of speeches from Federal Reserve officials. Atlanta Fed President Lockhart, San Francisco Fed President Yellen and Fed Board Governor Mishkin will speak today about the U.S. economic outlook at 8:30 am and 7:30 pm respectively. Dallas Fed’s Fisher will speak at 1 pm. Federal Reserve Bank Chairman Ben S. Bernanke will speak on Tuesday at 11 am EST in Berlin about global imbalances.
Euro propped by further ECB hawkishness Bank of France Governor Christian Noyer today confirmed European Central Bank (ECB) president Trichet’s hawkish comments on Friday indicating that the central banks’ analysis remains “rather positive. There is no reason at this stage to think that euro zone growth will be significantly affected by the current disturbances on financial markets," while asserting that ECB's injections of liquidity have been aimed at ensuring that the normal functioning of the money market, rather than bailing out speculators facing losses from the U.S. subprime mortgage crisis
These comments are a stark reminder that the ECB intends to resume its tightening cycle once the current credit turmoil has abated. Although the ECB eased its 2007 GDP forecast to 2.5% from 2.6%, it maintained its projections for inflation to remain above 2.0% in the coming months after settling around 2.0% in the medium term. With the ECB assessing no lasting economic impact from the current market crisis, the central bank’s message of staying on tightening course remains cemented in FX markets and supporting the euro.
Our intra-day EUR/USD is for a retreat towards the initial support of 1.3760, followed by 1.3740. The lack of major U.S. economic U.S. data will be replaced by Fed speeches, which will likely support the pair at 1.3740s. Upside seen capped at 1.3820.
USD/JPY sees intraday upside, capped at 114.50 The revision in Japan’s Q2 GDP to -0.3% q/q from the initial estimate of +0.1% (-1.2% y/y from prelim 0.5%) helped boost the rebound in USD/JPY from its 112.60 lows to as high as 113.88. A revised decline in second quarter corporate capital expenditures to -1.2% from prelim +1.2% was largely behind the downward revision.
The lack of major U.S. economic U.S. data today will be replaced by Fed speeches. As we have seen in past sessions where there are no major economic news, U.S. equity markets tend to rebound significantly, thus weighing on the Japanese currency. Similarly, this could boost USD/JPY above the 114 figure until interim resistance of 114.20. Key pressure point stands at 114.50. Minor trendline support stands at 113.30, followed by 112.80.
USD/CAD to remain under pressure We expect USD/CAD to extend its slide in the short-term as markets further react to Friday’s stronger than expected Canadian payrolls and market appetite eases for the day. The 23,000 rise in Canadian payrolls was accompanied by no change in the unemployment rate, which remained at a 33-year low of 6.0%. The report is the latest evidence of a resilient Canadian economy in the face of the credit market turmoil and the deteriorating macro dynamics in the United States.
USD/CAD gains are seen capped at the interim resistance of 1.0570, followed by 1.06--61.8% retracement of the 1.0676-1.0470 decline. We expect the pair to be pressured towards the 1.0530, followed by 1.0510.
Sterling gains seen capped at 2.0350 The combination of a temporary return of risk appetite coupled with overall negative USD sentiment will further lift cable towards the 2.0320s until resistance is encountered at 2.0350s. Target for the week stands at 2.04. Support rises to 2.02, backed by 2.0180.
Ashraf Laidi Chief FX Analyst CMC Markets US a.laidi@cmcmarkets.com
