Global equity indices take their queues from record-setting U.S. stocks, which is aiding a climate of rising risk appetite and strengthening high yield currencies. The big loser continues to be the Japanese yen, while the dollar sustains fresh selling against the euro, sterling, loonie, Aussie and Kiwi. Rising risk appetite during the lack of major U.S. economic data has become a familiar trend this year as “no news becomes good news.”
A closer look at yesterday’s release of the September Federal Open Market Committee minutes shows that the Fed’s 50-basis point rate cut was not only aimed at stabilizing market turmoil but also delivered to address emerging signs of macroeconomic slowdown. About the labor market, the minutes said “Although employment probably was not as weak as the most recent monthly data [August payrolls] had suggested, trend growth in jobs had fallen off even prior to the recent financial market strains, and participants judged that some further slowing of employment growth was likely.” The minutes added, “lower housing wealth, slower gains in employment and income, and reduced confidence seemed likely to restrain consumer spending in 2008.”
Friday’s release of September retail sales is expected to show a 0.2% increase in September along with a rebound in sales excluding autos. But preliminary reports from the International Council of Shopping Centers pointed out yesterday sales at the nation’s retailers grew 2.0% last month, the slowest pace in five months, which could make this year’s holiday season the worst in five years. Retailers have already started price cutting campaigns ahead of the holiday sales season, which could place a dent on profitability. FX markets will keep an eye on the U.S. earnings season and impact of the credit turmoil and housing slowdown across the economy.
Risk appetite, ECB hawkishness key in new euro gains Despite surging headline coverage of Euro politicians’ pronouncements regarding the strength of the euro, there has been relatively little noted about the simultaneous increase in hawkish remarks from ECB officials, aimed at countering speculation of a change in monetary policy. ECB board member Draghi is the latest to reiterate Trichet’s comments last week that inflation could come in above target in 2008.
At this juncture, the compelling signs of a cooling in Euro zone growth are not yet expected to prevent the European Central Bank (ECB) to call the end of the interest rate hike cycle. But even if the ECB does leave rates unchanged at 4.0% throughout 2008, the overall impact on the EUR/USD should remain bullish overall. We expect the EUR/USD to chart a temporary pullback to $1.39 in early Q4 before making a gradual recovery past the $1.4275 high by year-end. $1.45 is seen by end of Q1 2008, before a temporary pullback will delay the path back towards $1.47 in Q3.
USD/JPY consolidates, 118 not ruled out USD/JPY’s gains continue to reflect prolonged risk appetite, emerging from Friday’s non-farm payrolls, which deemed weak enough to trigger further Fed easing albeit strong enough to avoid any sense of urgency. Approaching its 100-day moving average 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.
King boosts sterling Sterling’s recovery above the $2.04 figure was partly aided by comments from BoE governor Mervyng King stating his reluctance to cut interest rates to bail out lenders from rising credit costs, and vowing to stick to the 2.0% inflation target. But considering the fact that UK inflation has fallen further below 2.0% in the last two inflation reports, speculation of a central bank cut has been especially fuelled by nascent signs of slowing mortgage lending and home price growth.
The lack of major data releases carries the potential of triggering a renewed bounce towards 2.05 this week as we see little in the way that could disrupt the current surge in risk appetite. Nonetheless, tomorrow’s release sales reports from U.S. retailers could be influential in determining the pair’s short-term move. Support climbs towards $2.04, followed by 2.0360.
Ashraf Laidi Chief FX Analyst CMC Markets US a.laidi@cmcmarkets.com
