Increased evidence of broadening losses at U.S. financial institutions raises chances that the Federal Reserve will be forced into further monetary easing, thus contributing to the deepening losses in the U.S. dollar. As a result, gold soars to $823 per ounce, less than $27 away from its all time high of Jan. 21, 1980. EUR/USD soars to a new high of $1.4555, and GBP/USD hits a fresh 26-year high of $2.0880.
Over the past 200 years, commodities had five secular bull-markets between the following periods, averaging a period of 22 years. Since gold prices hit record highs in each of the past five bull cycles, and since the current bull cycle is in its seventh year, it is inevitable that gold will break through its $853 all time high in the current cycle and most likely within the next month, as the Fed will be forced to ease. But even if the Federal Reserve resorts to forms of easing other than cutting rates (to stave off inflationary risks), capital market losses are likely to escalate, forcing the Fed to slash further its target overnight rate.
As the downside prospects for the U.S. dollar further deteriorate, the currency challenges will grow for the European Central Bank (ECB), Bank of England (BoE), Bank of Canada (BoC) as their currencies soar to record highs or multi-year highs against the U.S. currency. Rising inflation and robust growth in these economies has justified these central banks’ tacit silence in the face of the appreciation in their currencies.
The latest Senior Loan Officers Survey from the Federal Reserve shows the percentage of banks tightening lending standards on prime mortgages has risen to 40% in Q4 from 14% in Q3. The number of banks tightening standards on non-traditional standards rose to 60%. Lending standards have also been tightened for commercial real estate loans, surging to 50% from Q3. The retrenchment in loans may be a safeguard against deteriorating loan quality, but it will also speed up the overall decline in credit.
Euro soars on inflation, dollar lossesLess than week after the flash estimates of October inflation hit a two-year high of 2.6% y/y, PPI rose to 2.7% y/y in September, beating estimates of 2.6%. Rising inflationary pressures have acted as the “other” factor spurring the single currency, aside from general dollar woes. We do not expect the ECB raise interest rates this week mainly due to the already strengthening euro as well as renewed losses amid financial institutions.
Separately, Euro zone retail sales rose 0.3% in September for a 1.6% y/y increase, well below expectations of 0.6% m/m and 2.0% y/y.
In line with the aforementioned dynamics in gold prices, as speculators chase the $850 record, we may see a trend where the escalating gold rally will drive FX rates. EUR/USD has withstood bouts of risk aversion in equities, and could be expected to extend towards the 1.4620 target before week’s end. Now, only a change of focus from the ECB towards the downside risks weakness policy and/or signs of concerns expressed by the U.S. Treasury and the ECB are likely to stem the trend, barring any unexpected economic releases.
Preliminary euro support stands at $1.4440, followed by 1.4410. Upside capped at 1.4480, while a breach above the figure is seen capped at 1.4520.
USD/JPY drops as FX flows become dollar specificWe are witnessing a turnaround in USD/JPY falling towards 114.40 from the 114.70s as S&P futures are pricing a lower opening, reflecting renewed risk aversion. Unlike in previous bouts of risk aversion when the dollar would drop against the yen and stabilize against the rest of majors, the dollar is currently being hit across the board, reflecting corroding sentiment in the currency. FX markets are now shrugging Japanese fundamentals, making the USD/JPY rate largely in function of USD flows.
Failing to breach above the 114.90, USD/JPY is now drifting around the 114.40s, eyeing the 114.20 support, followed by 113.80.
Sterling’s shrugs negative data, thrives on dollar damage It is another day when weak UK data is shrugged by cable (GBP/USD) reflecting the magnitude of falling USD confidence. UK retail sales rose 1.0% in October, at their lowest pace in 11-months due to rising higher borrowing costs according to the British Retail Consortium revealed today. The figure followed a 3% rise in September and was well below the 2% forecast.
Although cable has hit the $2.09 figure, sterling is losing ground versus the euro at 69.71 pence in line with last week’s FX charts strategy. We expect cable to pause at $2.0930 for the day, with the risks focused towards 2.0840 and 2.08.
USD/CAD plunges to 92.38¢, awaits Ivey PMI The loonie soars to fresh 47-year high against the USD at 92.38, as oil prices surge to $97 per barrel. CAD traders will have their eye on this morning’s oil inventory data as well as the Canada’s Ivey PMI. The PMI is expected to have eased to 54.9 last month from 56, which may not hamper the CAD rally. We continue to favor CAD vs. NZD, AUD and GBP. CAD bulls are cautioned to scale down their longs vs. USD as the U.S. stocks session gets underway, where losses late in the session have often boosted USD/CAD. USD/CAD Upside seen initially capped at 93¢, followed by 93.30.
Ashraf Laidi Chief FX Analyst CMC Markets US a.laidi@cmcmarkets.com
