In a newly visible display of deterioration, the dollar hits new all time lows against the euro ($1.4300) and two-week lows against the yen (115.25) as the combination of further U.S. housing woes and disappointing earnings in the U.S.’ largest deposit bank raise the downside risks for the U.S. economy and increase chances of an October Federal Reserve rate cut. One day after the U.S. largest bank took an earnings hit in Q3, Bank of America, the United States’ second largest bank, reported a 32% drop in Q3 on credit-market write-downs and loan losses. Unlike earlier this week when market losses from Citigroup earnings boosted the U.S. dollar against most currencies on flight to quality, the current market declines are triggering broad dollar losses as the latest news are not only U.S.-specific (BoA largest U.S. deposit bank), but also due to Wednesday’s ominously weak U.S. figures on building permits and housing starts and today’s stronger than expected UK retail sales reducing chances of a 2007 BoE rate cut.
Worsening the dollar's declines is the bigger than expected 28,000 increase in weekly jobless claims to 337,000 last week, the biggest one-week surge since February 10. The figures increase the downside risks for the U.S. economy as they raise the likely repercussions of the current slowdown for the U.S. consumer and U.S. jobs.
Comments from Chinese central bank chief Zhou Xiaochuan indicating that more policy tightening will be needed to cool the overheating Chinese economy are boosting the Japanese yen on nervousness that reduced Chinese demand combined with a slowing world economy may further dampen global growth. Equally important, Zhou reiterated China will allow a greater role for market forces to determine the yuan's exchange rate, and that he was "sympathetic" to Europe’s concern about the yuan's level against the single currency. The currency comments could also be taken as lip service to the G7 meeting, which is expected to reiterate its calls towards China to adopt further currency flexibility.
We expect the official G7 communiqué on currencies to be modified only slightly by placing more emphasis on the undesirability of excessive currency moves, which is meant to be a veiled attempt at signaling coordinated efforts to support the falling dollar in the event of faster and “disorderly” depreciation. We also expect China to raise interest rates this Friday to stem inflation from its 6.2% level (more than double the government target), which would be a vocal message to the G7 that Beijing is conducting market-based measures to cool its economy.
Gold shines on broad dollar weakness
Gold surges above $760 per ounce as the dollar drops against both the yen and the euro, which is prompting traders to increasingly seek the metal currency as an alternative to the interest-bearing paper currency, whose yield is expected to be reduced further by the Fed. We have seen in the past how gold prices declined during a falling USD/JPY when the greenback held firm against European currencies and high yielding currencies. Such episodes were largely a manifestation of reduced risk appetite prompting traders to cash in their net longs in gold to meet their losses in equities and high yielding carry trades. Today, however, the rallying gold price is a reflection of further erosion in dollar confidence. Yet we do warn that the current gold rally may have to be reversed to as low as $710 per ounce as the amount of net long positions in the IMM futures market have reached a record high of 222,000.
Euro surges to new all time high at $1.43
Euro surges across the board on a combination of deteriorating U.S. fundamentals and reduced expectations that the European Central Bank will stick to its tight monetary policy stance, shunning calls from politicians to stabilize the euro’s appreciation. Wednesday’s figures on U.S. housing starts/ building permits have increased chances of an October Fed cut above 70%, while today’s higher than expected release of U.S. weekly jobless claims raises risks that the U.S. housing woes are extending to the U.S. jobs market.
EUR/USD faces resistance at $1.4330, followed by 1.4370. Support climbs to 1.4260, followed by 1.4270.
USD/JPY drops on PBOC, BoA, Fed cuts The dollar/yen decline first started on comments from Chinese central bank chief Zhou Xiaochuan indicating that more policy tightening will be needed to cool the overheating Chinese economy, a yen-positive development as it means increased chances of slowing world economy. The classic run on carry trades is boosting the yen across the board and dragging USD/JPY to 115.30. Key Support stands at 114.70, followed by 114.30. Upside capped at the 50 day MA of 116, followed by 116.20.
Sterling boosted by strong retail sales
Sterling holds firm in the midst of reduced risk appetite after UK retail sales volumes grew 0.6% on the month and 6.3% on the year, beating estimates of 0.3% monthly and 5.7% annual increase. Although the increase was largely due to broad price cuts, the data suggest strong domestic demand and pushes expectations of a BoE cut into Q1 from Q4. Also serving to ease chances of a BoE cut are the 13K drop in unemployment to a 2 1/2-year low in September and the stronger than expected 3.7% increase in the 3 months ending in August from 3.5% in July.
Sterling regains the $2.0470s, eyeing the $2.05 target, which we expect to be breached in the event of a weaker than expected Philly Fed survey due at noon today. Key resistance stands at $2.0535. Support climbs to $2.0440, backed by $2.0400.
Ashraf Laidi Chief FX Analyst CMC Markets US a.laidi@cmcmarkets.com
