The continued decline in the dollar must not take away from the theme of the strengthening euro as the single currency hits fresh all time highs at $1.3920, while surging to 14-month highs and two-week highs against sterling and the yen respectively.
European Central Bank (ECB) officials reiterate that interest rates remain accommodative, while the Bank of England (BoE) increasingly is being pushed into inaction by signs of slowing housing prices (first RICS price decline in two years) and peaking pay growth.
Meanwhile, the fact that oil prices are testing record highs of $80 a few days before an expected Fed rate cut illustrates the policy quandary of the U.S. central bank at a time when commodity inflation is at unprecedented levels.
The currency flows of the past 24 hours are a manifestation of interest rate expectations, with the dollar, sterling and the yen all sustaining greater downside pressure in light of the anticipated erosion of their yield relative yield differentials. Meanwhile, the euro, New Zealand dollar, Aussie and Canadian dollar are all boosted by persistent signs of steady growth, possibility of further rate hikes (EUR, CAD and AUD), rising commodity prices (AUD, CAD and NZD).
U.S. weekly jobless claims (8:30 am) are expected on the high side at 338,000 due to Labor Day weekend effects, but the holiday factor doesn’t preclude the rising pace of jobless claims since mid July, where the increase had ran been uninterrupted until the week of September 1.
Euro at new all time vs. USD, one-year high vs. GBP Euro accumulates fresh gains as ECB officials insist that monetary policy remains accommodative at the same time as they acknowledge the current credit turmoil. A report showing a 0.5% increase in Q2 Euro zone employment to 142.9 million maintained the annual growth at a historically high rate of 1.7%, which augurs well for consumer confidence and is in line with expectations for one more ECB rate hike towards 4.25%.
EUR/USD While the daily chart is starting to show overbought signs at the 1.3920s, the weekly chart suggest further gains towards $1.4030 by next week’s Federal Open Market Committee (FOMC) meeting. Interim upside target stands at 1.3955. Support starts at 1.3870. A drop below 1.3870 will trigger further selling towards 1.3850.
EUR/GBP soars to a 14-month high at 68.70 pence reflecting the hawkish comments from ECB’s Mersch and Milkannen as well as the UK RICS report on home prices and increased expectations that BoE rates have peaked. The weekly chart suggests 68.90 is a viable next target within the reach of a reasonable bullish MACD and relative strength index (56%). Expect further EUR/GBP in the event of a reduced risk appetite as the high yield sterling is seen reaching 69.30 pence. Support stands at 68.40, followed by 68.10.
EUR/JPY nears its 200-day MA after breaking is seven-week trendline resistance, targeting interim resistance at 159.80, followed by 160. Key pressure point stands at 160.60. Support starts at 159.20, followed by 158.50.
Yen broadens losses, USD/JPY eyes 115.30 We stick with yesterday's Tuesday’s chart note calling for further gains in the pair targeting the 114.50 and onto 115.00. PM Abe’s resignation may have been a welcome development to the markets but not his near immediate hospitalization, which spells more urgent need for his replacement. This week's reported contraction in Japan's Q2 GDP as well the temporary return of market confidence with respect of heightened certainty of a Fed rate cut next week remain the principal drivers of USD/JPY.
Nonetheless, despite the extended delay in the BoJ rate hike, markets remain cautious in their zeal to short the yen considering existing risks on the credit market front and the ongoing repercussions of renewed volatility in equities. It is worth reminding that the VIX index remains at 25, well above its 100 and 200-day moving averages of 18 and 15 respectively.
Support starts at 114.30, followed by 114.
RICS accelerates sterling’s losses Sterling drops across the board, extending yesterday’s post-earnings data damage, with declines accelerating overnight by the RICS survey. The Royal Institute of Chartered Surveyors’ latest UK housing market survey showed 1.8% more surveyors reporting a fall in house prices than those reporting a price rise, down from 10.8% reporting a rise in July. This is the first negative balance since October 2005.
The report further increases sterling’s downside risks especially as the high yielding currency has yet to unwind gains accumulated on expectations of further rate hikes. Especially risky for the currency is a renewed bout of risk aversion in the event of fresh declines in world equities.
Cable’s declines are in line with yesterday’s note indicating “interim support at 2.0270 and 2.0220.” Upside capped at 2.0280, followed by 2.03.
CAD at 30-year highs on rising oil, weak USD With oil prices testing the $80 mark and the U.S. dollar hit by rate cut expectations the loonie is amassing strength from both sides, especially after yesterday’s speech from BoC Governor Dodge who insisted on the need to battle inflation. With Canadian interest rates at 4.5%, there is a strong likelihood that they will near U.S. levels once the Fed begins to ease. A 40% possibility of more rate hike from the BoC remains in the works, with the strength of the loonie acting as the main deterrent to a tightening.
USD/CAD eyes support at 1.0320, followed by 1.03, while interim resistance at 1.0370 can be tested in the event of negative price action in equities. Gains limited to 1.0420.
Ashraf LaidiChief FX Analyst CMC Markets US a.laidi@cmcmarkets.com
