The dollar enters its eighth-consecutive day of record lows against the euro and dips to fresh multi-month lows against the majors as the combination of upside surprises in European and Asian data releases prolongs the deteriorating outlook for the U.S. interest rate differential. Past trading patterns have also shown negative dollar pressure to emerge ahead of U.S. data releases as the latest reports have moved from bad to worse. We do not expect any dollar reprieve in the event of further gains in U.S. stocks as reduced volatility (lowest VIX in two months) has strengthened dollar selling against all currencies, with the exception of the Japanese yen. But the latter could stabilize against the greenback in the event of negative U.S. new home sales.
At 8:30 am is weekly jobless seen rising to 317,000 from 311,000 the prior week, Despite their rising trend, claims are well below the 370,000 to 400,000 levels prevailing during the last two periods of Fed easing in 2000 and 2001-2003.
Also at 8:30 am EST is the final release of U.S. Q2 GDP is expected to show a downward revision to 3.9% from the previous recorded 4.0%. The report is unlikely to trigger any considerable market reaction, but the accompanying estimates of Q2 corporate profits may draw interest from Wall Street.
The much-anticipated new home sales report at 10 am is expected to show a 4.6% decrease in sales to 830,000 in August, following a 2.8% rise in July and decrease of 4.0% and 2.9% in June and May respectively. A decline of more than 4% is expected to translate into an annual decline of more than 16%, which would be in line with the double-digit rate attained in previous months. Considering the spate of bad housing news from the United States this week, any figure showing a decrease of more than 4% is likely to cast further damage on the U.S. dollar.
On the Fed speaking circuit front, Fed Chairman Bernanke will give opening remarks at a Federal Reserve Board conference on globalization at 1 pm.
Fed Board governor Mishkin will speak at 5:30 pm on globalization and monetary policy.
EUR/USD hits record high for eighth straight day The euro’s remarkable feat of hitting new record highs vs. the dollar for the eighth consecutive day – and closing at record highs in four out of the eight days – has principally emerged on the European Central Bank’s (ECB) hawkish rhetoric despite signs of cooling in the Euro zone. Indeed, eroding dollar sentiment did help the pair, but the single currency is also at 34-month highs vs. the British pound, two-month highs vs. the Swiss franc and one-and-a-half-month highs vs. the yen. ECB President Jean Claude Trichet kept up the hawkish tempo today when said the bank’s baseline scenario remained unaffected by market turmoil, and that despite increased uncertainty, price stability remained the priority.
The decline in Germany’s unemployment rate to 14-year lows at 8.8% in September and the 11.6% rate in Euro zone annual M3 money supply growth were a double positive for the currency. Although M3 growth has slipped from 11.7%, the pace remains excessively high for the ECB’s mandate of price stability. Yesterday’s inflation figures from Germany suggested that Euro zone inflation might exceed the 2.0% preferred figure of the ECB this month, which will justify the central bank’s hawkish mantra.
The four-hour momentum in euro’s price growth suggests a modest cooling that could signal a retreat to $1.41, but support seen standing at the 1.4090 trend line support. Upside capped at 1.4160, followed by 1.4195.
Sterling rallies on housing prices
Sterling made another sharp 100-point jump past the 2.0240 this time on UK data. The Nationwide index of house prices rose 0.7% m/m in September, exceeding forecasts of 0.3%, while the y/y increase stood at 9.0%, exceeding forecasts of an 8.7% rise. The currency shrugged the three-month pace of 1.6%, which was the lowest since July 2006. Yet give evidence of a slowdown from the RICS survey earlier this month, today’s data came as a surprise to sterling bears. Nonetheless, the slowing pace on a three-month basis clearly suggests that the trend has become that of easing.
Most notable about the GBP/USD rate is the increased volatility resulting from weakness in U.S. data and mixed figures from the UK. But sterling’s performance versus the rest of the currencies is less ambiguous. Sterling has now fallen to 34-month lows against the euro, 24-month lows against the Aussie, 17-month lows against the Canadian dollar and nearing six-month lows against the Swiss franc. But against the dollar, it only fell to a one-month low last week. The avalanche of sterling negative news started with data showing a monthly decline in home prices, followed by sub 1.9% inflation, the Northern Rock debacle and finally reports that Britain’s depositors’ insurance has been significantly eroded due to rising payouts to depositors at failed credit unions. The news indicate that not only the high yielding sterling will begin to lose some of its luster — from current rates of 5.75% - but the rate cuts could begin as early as this year. Since currency markets allocate significant weight on anticipating central bank moves, and since the pound’s run-up of the last year had been founded on the highest interest rate in the G7 world, a reassessment of the BoE rate outlook explains the sharp sell-off in the currency.
A report from the OECD released today suggested the Bank of England might need to cut interest rates. The Paris-based organization has reduced its 2007 GDP growth forecasts for all major industrialized economies but did not suggest an easing in the Euro zone or Japan.
While further sterling losses against the Aussie and Canadian dollar may not be ruled out, ample downside room remains against the beleaguered U.S. dollar. Despite the negative news flow from the U.S. and continued anticipation of at least 50-bps in Fed easing before year’s end, there is amble downside ground for cable towards the $2.0000 level from the current $2.0150.
The U.S. data on new home sales will have to slow to at least the expected 830,000 to offset any resulting upside in sterling. Upside is now capped at 2.0280, followed by 2.0320. Support has climbed to 2.0165, followed by 2.0120. A breach below $2.0100 stands to stabilize at $2.0080, a level marked by the 50% retracement of the 1.9876-2.0316 rally.
USD/JPY eyes 116.00 barring negative U.S. home sales
Having broken its one-week trend line resistance of 115.20, USD/JPY now approaches its five-week trend line resistance at 115.75-80. Barring a negative release from U.S. new home sales (a figure better than 850,000), the climb is apt to extend towards 116.00. Considering the downside risks for this week’s U.S. data, we incorporate these fundamental factors into the said resistance, at which renewed selling is expected to trigger 115.20. Subsequent target stands at 114.85, 50% retracement of the 114.04-115.72 move. Key foundation stands at 114.50.
Kiwi, Aussie flex high yield muscle to two-month highsIt is the best of both worlds for the New Zealand and Australian dollar as the combination of high yield and falling global equity volatility (VIX at two-month lows) encourage drive investors to these currencies against the damaged and low yielding U.S. dollar as well as European currencies. A survey showing business conditions in New Zealand to have risen in Q3 – first time this year – propelled the Kiwi past the 74.40¢ level and onto 75.20. A report showing a 6.5% year on year decline in Australian skilled job vacancies this month boosted the Aussie past the 87¢ figure onto 88.16. Rising gold prices continue to sustain the Aussie, especially as the metal has consistently closed above the $720 per ounce level over the last eight days.
NZD/USD sets sight on preliminary target of 75.30 and 75.55, which is the 61.8% retracement of the July 24 high to the August 17 low. The recent uptrend in Kiwi has shown that corrective down moves have extended to as many as 60 pips, meaning we could see a retreat to as low as at 74.50s before we may retest the 75.20s.
Aussie has risen for the last eight straight days against the dollar, and is half a cent away from the 19-year highs attained in late July. Upside seen initially capped at 88.35, followed by 88.55. Support stabilizes at 87.80.
Ashraf Laidi Chief FX Analyst CMC Markets US
a.laidi@cmcmarkets.com
