The latest signs of dollar weakness are manifested in the euro’s ability to hold above $1.4050 despite Germany’s IFO business survey falling to 19-month lows. The report is the latest in a series of recent data showing the Euro zone recovery is losing steam. But the dollar failed to garner any real ground versus the single currency after the latter retreated off Monday’s record highs of $1.4130.
Will dollar become the new yen? Risk aversion returns to the markets after a two-week absence, boosting the dollar against high yielding currencies after Britain’s deposit protection agency revealed its reserves have been significantly eroded due to rising payouts to depositors at failed credit unions. The news is triggering a typical unwinding of carry trades, hitting the sterling and its high yielding counterparts in Australia and New Zealand while benefiting the U.S. dollar and lower yielding currencies. This latest threat to systemic risk may be the much-anticipated source of stability to the U.S. dollar as the currency benefits from emerging risk aversion and a resulting retreat in gold prices.
As the U.S. dollar sustains a sharp blow to its yield structure with further deterioration (rate cuts) seen ahead, it may well become a funding currency especially in the event of anticipated gains in gold based on prolonged weakness in U.S. housing. Aggregating the U.S. dollar’s rate differential to that of rates in the UK, Euro zone, Japan, Australia and Canada, the total differential stands at 2.75%, its lowest position since August 2005.
U.S. existing home sales are due at 8:30 am expected to have dropped 4.5% in August to 5.49 million from 5.75 million.
The S&P/Case Shiller Home Price Index for July is due at 9 am, following a 217.1 in June. The composite 20 index stood at 199.2 in June from 200.0 in May.
U.S. consumer confidence due at 10 am is expected to have dropped to 103 in September from 105.
Euro resilient despite evidence of slowing Euro zone Part of the reason to the euro’s resilience in the face of the weak IFO were comments from European Central Bank’s Nicolas Garganas who reiterated monetary policy is still on the accommodative side and adding that the would not damp inflationary pressures. This remark about the euro is an essential element of the euro’s sustainable strength even as economic data increasingly show signs of cooling. Germany’s IFO survey of current business conditions fell to 109.9 in September from 111.5 in August, well below forecasts of 110.0. The business expectations index tumbled to 98.7 from 100.4 in August, undershooting forecasts of 99.5. One particular remark from the IFO in line with Garganas’ statements indicating the lack of fears about future export business from the high exchange rate.
The other reason to the euro’s resilience is anticipation of further weakness in today’s housing data from the United States. Support stands at 1.4050. In the event of an upside surprise in the U.S. data, or in case that the weakness is smaller than expectations, then we could see more aggressive euro selling, towards the 1.40. Upside capped at 1.4130.
Sterling tumbles on dwindling depositors’ insurance Our bearish calls for sterling are being realized from the latest negative revelations in the UK mortgage industry, this time related to increased strains on insurance funds to depositors at credit institutions. Britain’s deposit protection scheme currently holds reserves of only £4.4 million, which could mean sharp price increases on consumers in the event that the Chancellor finalizes plans to increase guarantees to £100,000 per person. Preliminary reports also indicate that authorities may resort to special reserves set aside by credit institutions, a possibility that could further post cost pressures on the financial industry, thus prompting a bailing out from the Bank of England and a potential cut in interest rates.
GBP/USD briefly touched the 2.0080 support before regaining the 2.01 figure. We expect renewed pressure to reach the 2.0050 target. Key support stands at 2.0010. Upside capped at 2.0130, followed by 2.0160.
USD/JPY flexes muscles amid fresh problems with high yielders Now that the effect of the Fed’s 50-bps dosage of risk appetite is being gradually offset by auto strikes in the U.S. and falling banking confidence in the UK, U.S. and global stocks are seen resuming their sell off, which should boost the low yielding Japanese currency. We expect USD/JPY to test the 113.95 support, below which foundation stands at 113.60. Upside capped at 114.50.
Ashraf Laidi Chief FX Analyst CMC Markets US a.laidi@cmcmarkets.com
