Less than one week after the Fed surprised markets with a bigger than expected 50-basis point rate cut, markets are already pricing at least 50-bps more easing in the funds rate as the rate remains above 10-year yields, suggesting a required decline below long term rates. The chart below shows that the two previous easing cycles were concluded once the funds rate fell well below the 10-year note. Another signs of further easing to come is that two-year yields are more than 50-bps below the fed funds rate, a situation that not only required further Fed easing but also was associated with recessions. Notably, our year-long predictions for Fed easing were particularly based on the fact that funds rate had exceeded long-term yields since May 2006.
This week’s key U.S. data on existing and new home sales is expected to show the lowest figures in 5 years. Wednesday’s release of the August durable goods orders is expected to show a decline of as much as 5% following the 6.0% increase in July. Friday’s personal consumption/income will provide with much awaited info on the spending in light of the deterioration in home sales and falling prices. Yet the bulk of the negative impact on consumption may not fully materialize until next year’s reset adjustments.
Much Fed talk this week after last week’s actionFed Chairman Bernanke is due to speak today at 1 pm on education as well as on Thursday. Fed Board Governor Mishkin’s Thursday speech on domestic prices should be of interest, as it will shed light on the extent to which the central bank remains vigilant on inflation. More speeches are due on Friday from the presidents of the district banks of Atlanta, San Francisco and St Louis.
EUR/USD awaits tomorrow’s IFO, U.S. housingEuro holds above the $1.410 level after hitting another record high at $1.4130 despite a bigger than expected decline in Euro zone industrial orders. Orders fell 4.0% in July after 4.5% increase in June. The year on year rate rose 10.9% on the year after an upwardly revised 14.0% (+13.8%) in June. Despite this morning’s data and Friday’s larger than expected drop in Euro zone PMI, the single currency remains boosted by deteriorating dollar sentiment backed by expectations of further Fed easing and more weakness to come in the U.S. housing front.
Nonetheless, Euro bulls must be warned ahead of tomorrow’s IFO survey on German business sentiment, expected to have eased to 105 in September from 105.8, while the current assessment index is seen down to 111.0 from 111.5. The expectations index is seen at 99.4 from 100.4. The IFO survey has a considerable track record in signaling cyclical peaks and turnarounds in the Euro zone’s largest economy. An unexpectedly weak showing is likely to drag the pair below 1.4030 with the extent of the selling depending on U.S. existing home sales. Upside seen capped at 1.4130. Support to start at 1.4060, followed by 1.4030. Key support stands at 1.3980.
USD/JPY seen regaining towards 115.40 on risk appetite The lack of key U.S. economic data in the U.S. is expected to boost USD/JPY above the 115.00 and onto 115.35-40. Empirical data have shown that the lack of economic releases was a positive for risk appetite and U.S. stocks, thereby encouraging short-term bouts in carry trades. In addition, falling crude prices and the improved technical patterns in the S&P 500 suggest an up day in U.S. equities.
The election of Yasuo Fukuda to Japan’s Premiership is seen as the safest choice as the 71-year old PM is unlikely to make any substantial changes in policy. Nonetheless, this is unlikely to alter the outcome of markets’ expectations for the Bank of Japan, which is expected to hold rates unchanged for the rest of the year.
Upside seen capped at 115.20, followed by 115.40, which is the 61.8% retracement of the decline from the 116.28 high to the 113.97 low. Support starts at 114.80, backed by 114.65.
GBP/USD eyes 2.0180Sterling’s run up above the $2.0290 was on a combination of improved global equity sentiment and worsening expectations for the U.S. outlook. The lack of major data from the UK means that the pound is likely to be impacted by any major moves in the euro – such as post IFO and German employment. We expect the pair to extend losses towards the 2.0220s and find support at $2.0190. Upside capped at 2.0270.
Ashraf LaidiChief FX AnalystCMC Markets USa.laidi@cmcmarkets.com
