The dollar gets a reprieve from its all time lows against the euro at the expense of broad yen selling as risk appetite gains on strong gross domestic product (GDP) numbers in the United Kingdom and inflation figures in Canada. Today’s lack of economic data from the United States assures the absence of any negative revelations on the macroeconomic front, and shifts attention to equities, where strong results from the technology sector help stabilize appetite. Strong inflation figures from Canada are spurring the loonie across the board, adding an extra boost to the oil-driven currency (more below).
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. It is also important to note that the dollar’s weakness has been not only appropriate, but also a reflection of fundamental forces, with U.S. interest and growth differentials declining relative to the Europe, Canada and Australia.
Loonie flies to fresh 31-year highs vs. USD The Canadian dollar drags the greenback to fresh 31-year lows at 96.58¢ after Canada’s CPI jumps 2.5% y/y from 1.7%, further boosting the currency, which is already rallying on $90 per barrel oil. Accounting for more than 85% of Canada’s exports, oil prices have made the Canadian dollar the highest performing currency in the G10. Although the Bank of Canada (BoC) expressed increased risks to the downside earlier this week, its inflation assessment remained largely unchanged. Despite the status quo in interest rates, rising oil prices and an improved rate differential both are seen benefiting the currency across the board.
Rising oil prices and improved risk appetite are a double positive for the Canadian dollar, which should extend USD/CAD selling towards 96.50 and 96.30. Upside capped at 96.90, followed by 97.20.
CAD faces further upside against the NZD (0.7265) and AUD (0.8645).
Euro hesitates at $1.43 ahead of G7
An unwinding of dollar selling trades capped the euro at $1.43, especially as traders stayed on the sideline ahead of this evening’s communiqué from the G7. The fact that Germany’s finance minister indicated that the economic upswing remained sound and that momentum likely to have picked up in Q3, dispels the notion of any plan from Euro politicians to talk down their single currency. And with U.S. Treasury Secretary Hank Paulson reluctant to talk up the dollar, the only likely meaningful outcome is for a repeat of coordinated calls for China to achieve more flexibility in its currency.
EUR/USD faces interim support at $1.4270, followed by 1.4255, while upside is capped at 1.4290. The key resistance of 1.4330 may be breached in early Asian Monday trade on a relief rally as traders find no signs of currency concerns from the G7.
USD/JPY capped at 116 USD/JPY recovered from 114.85 to 115.70 in early European trade, but faced renewed resistance before retreating towards the 115.50s. The absence of a rate hike from the PBOC has also helped weigh on the Japanese currency. We do not expect the G7’s reiteration of singling out China’s currency regime to affect the yen. Nonetheless, the technical chart of USD/JPY remains vulnerable to further selling momentum especially amid the failure to regain the 50-day moving average at 115.80. Our month end target stands at 114.50. Upside capped at 115.80, followed by 116.
Sterling boosted by GDP
More good news for the GBP as U.K. preliminary Q3 GDP rose 0.8% in Q3 q/q and 3.3% y/y, beating expectations for 0.7% and 3.1% largely due to a robust services sector. Following this week’s strong showing in retail sales and employment, sterling takes the upper hand, despite a sub 2.0% inflation report. This reduces our expectations of a Q4 rate cut from the BoE to 40%. Nonetheless, we do have to watch next month’s release of the BoE quarterly inflation report as well as the potential of renewed systemic risk emerging from the banking sector.
The GDP report and lack of economic data is likely to pave the way for a three-month high at $2.0515, followed by 2.0550. Support stands at $2.0460, backed by $2.0420.
Ashraf Laidi Chief FX Analyst CMC Markets US a.laidi@cmcmarkets.com
