More bad news on the US data front as durable goods orders fell 4.9% in August after a 6.1% rise in July. Expectations were for a 4.0% decline. Orders ex-transportation fell 1.8% after a 3.4% increase in July while ex-defense orders fell 5.9%. Slumping orders in Boeing and auto manufacturers played a key role in the headline figures.
The recurring pattern of renewed dollar weakness despite signs of a slowdown in the Euro zone and UK suggests that negative dollar sentiment remains intact and is founded on further erosion in the currency’s yield structure. Tuesday’s releases on existing home sales, home prices and consumer confidence presented a disconcerting display of prolonged economic weakness. The latest declines in pending home sales and building permits suggest further deterioration in future releases of existing and new home sales as well as housing starts. The rise in the months’ supply of homes to a record high 9.8 is also a stark indicator of future declines in home prices. Especially disconcerting about the housing sector is the far-reaching implications of deterioration on the broad economy. Aside from anticipated layoffs in the construction and mortgage industry, banking and auto industries are also expected to suffer as the spillover of mortgage losses hits the former and a falling wealth effect weighs on the latter.
Euro stabilizes after US data Euro is half a cent lower from its latest record high of 1.4160 as it finally retreats following its 100-point rally on Tuesday, which was largely fed by the US data reports. The euro’s resilience in the face of yesterday’s weak IFO were comments from ECB’s Nicolas Garganas who reiterated monetary policy is still on the accommodative side and adding that the would not damp inflationary pressures. The weaker than expected report on U.S. durable goods orders is likely to stabilize the euro’s retreat around 1.41. Resistance seen limited at 1.4150, while support stands at .41, followed by 1.4060.
Sterling’s see more vulnerable without weak U.S. data Sterling sustains renewed weakness after the Bank of England Credit Conditions Survey showed tightened lending in the corporate sector in Q3 and a “significant drop” in corporate lending in Q4. Although the survey shows that the households were unaffected in Q3 by the credit market squeeze, the recent events of Northern Rock may have a delayed spillover into Q4.
A notable force behind sterling’s Tuesday rally were the disappointing U.S. reports, without which sterling would have extended its declines towards the $2.00 on reports of eroding insurance funds for British depositors.
The final Q2 GDP was revised up to 3.1% y/y from 3.0%. Markets, however, are setting their sighs on an expected weakening in Q3 and Q4 to the extent that the BoE may have to consider easing rates as early as January. The minutes of the upcoming October MPC meeting will be crucial in assessing the shifting debate among the Committee members and whether any members have raised the question of cutting interest rates.
GBP/USD briefly returned to Tuesday’s lows of $2.0080, a level marked by the 50% retracement of the 1.9876-2.0316 rally. U.S. durables is helping sterling recover above $2.0160, but upside capped at 2.0230. Support starts at 2.0130, followed by 2.01. Key foundation stands at 2.0070.
USD/JPY awaits U.S. data, 115.60 eyed USD/JPY breaches a 1-week trend line resistance of 115.20 and sows potential to extend towards the 115.60. Despite weak U.S. data, we see USD/JPY holding at 114.80-90. The stock market reaction will also be crucial in determining the yen’s cross interplay with risk appetite flows. Key resistance stands at 115.60. Support stands at 114.80, backed by 114.50. A drop of more than 5.0% is likely to accelerate losses towards 114.20 and pave the way for 113.90.
Ashraf Laidi Chief FX Analyst CMC Markets US a.laidi@cmcmarkets.com
