The return in risk appetite manifested through rallying equities and falling yen must not overlook the improved fundamentals in the high yielding currencies of AUD and NZD, whose central banks maintain cautiously hawkish stances. The same cannot be said for the high yielding GBP, whose multi-year sell offs against the antipodean currencies is expected to spillover towards lower performing FX such as USD.
Stronger than expected industrial production figures from the Euro zone and Germany have empowered the EUR/USD to bounce off its 1.4016 lows and overcome downside pressure emerging from politician’s rhetoric. Yet, it is important to note that while ECB officials have begun to pay more lip service to the downside risks to growth, they remain firm in their reiteration of upside price risks. This tendency towards more symmetry in risks is also seen in J.C. Trichet’s currency rhetoric, where his explicit reference to U.S. official’s mantra of a strong dollar being in the U.S. interest is not at the expense of making any remarks regarding the pace of the euro’s strength. Only when Trichet & Company begin to ease from their hawkish rhetoric vis-a vis-inflation will we see a protracted EUR/USD decline below $1.3940.
USD/JPY Capped at 117.95The latest gains in USD/JPY reflect the dollar’s recovery and the yen’s broad weakness with the Japanese currency pulling back even against the struggling euro and sterling. As U.S. equities extend to new highs and risk aversion is further reduced, we warn of the macroeconomic catalyst for renewed USD weakness as manifested through Friday’s non-farm payrolls. The possibility that we see dissent in this week’s release of the FOMC minutes from last month’s 50-basis point rate cut may also cap the dollar as it reminds markets that further easing lies ahead.
Approaching its 100-day MA and the 50% retracement of the decline from the 124.21 high to the 111.63 low, USD/JPY faces a key juncture in its four-week rally. Key resistance stands at 117.75, a break of which is likely to emerge on the heels of further weakness in jobless claims and a rebound in retail sales.
Weak Sterling Crosses to Weigh on CableSterling is regaining the $2.03 figure amid broadening dollar weakness toward the end of European trade partially resulting from reports of Al Qaeda vowing to step up its attacks. The fact that sterling shrugged stronger than expected 1.8% increase in September BRC sales illustrates the currency’s waning foundation. Hitting 10-year lows against the Aussie and 34-month lows against the euro, sterling’s interest rate foundation is being increasingly questioned against the non-USD currencies. While the U.S.’s shaky fundamentals will provide a foundation for cable at $2.00 and $1.9850, the potential for downside ground from $2.03 to $2.01 remains significant. Further signs of cooling in housing and the lack of rebound in CPI above the 1.9% level will raise the odds of a November rate cut, which we currently deem at 40%. Incoming data will be crucial in determining the outcome of the Bank of England’s quarterly inflation report due next month, which should play a major role in the MPC’s November decision.
Resistance slips to $2.0340, followed by 2.03. Key foundation stands at $2.0250, backed by $2.02.
AUD/EUR eyes 65¢
Despite the seven consecutive weekly gains, we expect AUD/EUR to retain further moves ahead towards the 65¢ figure. Last week’s release of stronger than expected 0.7% increase in August from July's 0.7% is likely to preserve the RBA's cautiously hawkish stance. Upside momentum in the cross pair is seen reemerging on the heels of a broadening but temporary euro retreat. A corrective pullback may be limited at 0.6160, but such a move would be more associated with falling risk appetite than with weak Aussie fundamentals. The pair should remain a viable play in the medium term as long as gold prices remain above $705 per ounce.
Ashraf Laidi
Chief FX Analyst
CMC Markets US
