After a brief sell-off in high yielding currencies against the yen emerging on fresh worries from the Northern Rock fallout, FX rates are stabilizing and the yen comes off its highs. The exception was the New Zealand dollar, which leapt to fresh six-week highs against the U.S. dollar on stronger than expected Q2 GDP report. See more below. Evidence that struggling Northern Rock sought an extra £5 billion from the Bank of England last week signals that not only the bank’s woes are far from over but also suggests the risk of similar fallout at other credit institutions. But the news served only as a brief distraction away from the wilting U.S. dollar, which finally hit an all time low yesterday against a basket of currencies since the index was started 40 years ago.
U.S. Personal spending, income and the Fed’s preferred core PCE index are all due at 8.30 am EST. August spending seen matching July’s 0.4%, personal income seen at 0.4% from 0.5%, while the core PCE price index is expected to up 0.1% from July’s 0.1%, translating into a year on year rate of 1.8%, following 1.9%. The 1.9% y/y reading would be the lowest since February 2004, further dampening the Federal Reserve’s inflation concerns in its policy priorities. But a sub 1.9% reading in the core PCE may not necessarily be dollar negative if in the event that consumer spending comes in at least 0.4%. It is worth mentioning that PCE series are largely being propped by the owner-occupied rent component, whose contribution to the index is estimated to be as high 0.09%.
At 9:45 am is the Chicago PMI expected to have slipped to 53.1 in September from 53.8 in August. Although the correlation between the Chicago PMI index and the manufacturing ISM has weakened over time, the report continues to have considerable impact on market reaction. In August, the 3-month average fell to 5-month low of 52.0. While all the major components of the index remained above 50, there was considerable weakening in the employment index, which fell to 53.7 in August from 61.6.
Also at 10 am is construction spending seen falling 0.3% after a 0.4% decline in July.
The final release of the August University of Michigan consumer sentiment seen at 84 from 83.8. The index is not expected to show the gloom of the Conference Board’s consumer confidence index, which is more tied to the labor markets. The University of Michigan’s consumer sentiment index allocates more weight to the stock market.
Record-breaking euro unrelenting after inflation The European Central Bank’s persistently hawkish rhetoric is being justified by estimates for Euro zone August inflation coming in at 2.1% y/y after 1.7% in August. This would be the first time since Aug 2006 that inflation has been above the central bank’s target of close to 2.0%.
Meanwhile, the Euro zone economic sentiment index fell to 107.1 from August’s 110.0, marking the fourth consecutive decline after the 112.1 peak in May. The combination of rising inflation and cooling growth has not yet weighed on the single currency as long as the ECB continues to place rhetorical emphasis on price stability and signal the door open for policy tightening.
The four-hour chart suggests there is technical upside ground towards 1.4220, which could be attained in the event of weak U.S. data. Key resistance stands at 1.4250. Support stands at 1.4170, backed by 1.4145.
Sterling’s rising volatility increases vulnerability Cable’s volatility remains the highest among the major pairs as sterling’s swings are driven by Northern Rock news/weak UK data on one hand, and negative dollar sentiment on the other. News reports overnight that Northern Rock had borrowed an extra £5 billion from the Bank of England last week drove down cable by a full cent to 2.0199. The currency was also dragged by decline in UK GFK/NOP consumer confidence to -7 in September from -4, just below median estimates of -6.
We reiterate that the choppiness in cable is an ominous sign for the currency’s medium-term outlook, especially with UK fundamentals looking increasingly shaky and the probability of a Bank of England rate cut before year-end gains in strength. Support stands at 2.0250, followed by 2.0220.
USD/JPY torn between data and risk aversionThe yen started off on a weak note when Japan's unemployment rate rose to 3.8% August from 3.6% and nationwide core consumer price index fell 0.1% m/m. The August jobless rate, released by the Ministry of Internal Affairs and Communications, rose from 3.6 percent in July. But the yen quickly rebounded after news that Northern Rock’s emergency borrowing triggered nervousness of further fallout in the UK and rest of Europe.
Having failed to break its five-week trend line resistance at 115.75-80, the pair now eyes the 114.90 target ahead of the U.S. releases. Subsequent support stands at 114.70--the 61.8% retracement of the 114-115.86, followed by 114.50. Upside capped at 115.50.
Kiwi stands out on strong GDP The New Zealand dollar stood out of the rest of the low yielding currencies to hit a fresh 6-week after Q2 GDP growth rose 0.7% q/q and 2.2% y/y exceeding expectations of 0.5% and 2.1% respectively. The data means that the RBNZ may have to use the strong currency as a means to tackle inflationary rather than increasing already high interest rates. The data follows a stronger thane expected showing in Q3 business conditions.
NZD/USD breaks above the 61.8% retracement of drop from the July high to the August low, eyeing 75.90. 76.30 stands as the subsequent target for next week in the event of weak ISM survey from the United States. Downside starts at 75.40, followed by 75.20.
CAD awaits GDP at 99.80 cents Rebounding oil prices, returning risk appetite as well as deteriorating USD sentiment pushes the loonie to fresh 31-year highs at 99.80 cents. We could see further gains at the 8.30 am release of July GDP seen at 0.4% from 0.2%. Although Canada’s finance minister acknowledged the potential negative effects of the strong loonie, no such claims were made by BoC officials. GDP strength should help drag USD/CAD towards 99.50, but a close watch must also be given to U.S. personal spending. A weaker than expected GDP and a negative open in stocks is likely to boost the pair back to 1.0030.
Ashraf Laidi Chief FX Analyst CMC Markets USa.laidi@cmcmarkets.com
