Although Japan’s equity benchmarks (Topix and Nikkei-225) closed lower for the eighth consecutive day overnight (longest losing streak since September 2004), risk appetite is stabilizing after yesterday’s sell-off, as the high-yielding currencies rebound against the dollar and gold regains the $800 per ounce figure. The improvement in risk appetite is especially demonstrated in the euro’s surge from its overnight lows of $1.4525 to the current $1.4600 despite a plunge in Germany’s ZEW economic sentiment indicator.
This demonstrates that Monday’s dollar rebound was largely a reflection of repositioning by traders unwinding excessive dollar shorts during an abrupt assault on risk appetite rather than any sudden improvement in the fundamentals of the U.S. economy and its currency. Despite regaining the 110-yen figure from its 109.20-yen lows, USD/JPY remains under pressure after stronger than expected Japanese Q3 gross domestic product (GDP) figures.
November 15: Another August 15?
The next bout of turmoil may emerge on Nov. 15, which marks the last day of the 45-day notice period at which clients should notify hedge funds to withdraw their money. With the broader market down nearly 7% since the beginning of the quarter, clients may take some money off the table, as was the case in Q3 when Aug. 15 was marked with massive selling across all equity indices. At the open of August 15, the S&P 500 was down 5% since the beginning of Q3. Today, the S&P 500 is down 5.7% since the beginning of Q4. In this case, we expect renewed rallies in the yen crosses and for the Aussie, kiwi and loonie to come under renewed pressure.
The fact that the VIX measure of volatility stands at two-month highs and the S&P 500 is below its medium and long-term averages (50, 150 and 200 day) underlines lingering preoccupation in the market. Given the technicals in the U.S. benchmark indexes and the ongoing re pricing of MBS via credit rating downgrades, we expect the indexes to retest their August lows. This means that another 5% decline in the S&P 500 is in store.
Another negative last hour of equity trading?
The day’s only data release is due at 3 pm EST when the National Association of Realtors’ Pending Home Sales index is expected to have dropped 6.5% to 85.5 in September, after falling 6.5% in August and plunging 10.7% in July. The report could weigh on the market, especially as stocks have proven to be increasingly vulnerable during the last hour of trading. This has also become consistent with a retreat in high yielders during late U.S. trading.
Euro resilient despite ZEW
Euro manages to regain the $1.46 figure despite the ZEW’s decline to a 15-year low of -32.5 in November following -18.1 in October. The sub-prime crisis have caused market participants to revise their economic expectations downwards on the heels of credit strains working their way into the economy and weaker prospects for demand from the US.
Euro zone industrial output declined 0.7% month-on-month in September, following a 1.2% increase in August. This translated into an annual growth of 3.5%, vs. expectations of a 4.5% rise.
Renewed increase in risk aversion in the U.S. session should drag the pair towards the 1.4570. But as long as gold prices remain above the $800 figure, we can expect pair to find support above 1.4550. Traders are cautioned that Wednesday’s release of U.S. retail sales may surprise on the downside, which could provide a renewed fillip to the euro. Upside capped at 1.4660.
USD/JPY caught between data and comments
USD/JPY is once again caught between comments from Japanese officials’ capping the currency and the combination of falling risk appetite and strong Japanese data boosting the currency. Japan's Q3 GDP grew 0.6% from the previous quarter, exceeding forecasts of a 0.4% rise and translating into annualized increase of 2.6% vs. consensus forecasts of +1.7%. This followed a quarter-over-quarter contraction of 0.4% in Q2. The rise in consumer spending offset a sharp retreat in residential investment. But prior to the release of the report, Japanese Prime Minister Fukuda's interview with the Financial Times hit the wires indicating that the yen was rising “too fast” and would “certainly be a problem” over the short term. The comments offset statements made one day earlier by Japan’s top government spokesman Machimura indicating that Japan would not intervene in currency markets and that, "It's wrong to think a high yen is something bad for the Japanese economy.”
Overall, the effect of such comments is expected to slow the pace of the yen’s strengthening rather than reverse it as long as the aforementioned downside risks continue to be posed for capital markets and U.S. fundamentals.
Only a sharp rally in U.S. equities (+0.6-+0.7%) is expected to lift the pair past the 110.50 resistance. Support stands at 109.80, followed by 109.40.
Sterling boosted by high CPI, capped at $2.0770 Higher than expected U.K. inflation may pose difficulties for the Bank of England (BoE) as the figures on housing, services and manufacturing increasingly point on the weak side. Annual CPI rose to 2.1% in October from 1.8% in September, pushing above the BoE’s 2.0% target for the first time in 4 months. Although the core CPI remains at 1.5%, increased price pressures will likely push the BoE to issue a relatively hawkish inflation report tomorrow, in which case will support the currency above the $2.05 figure. The report eliminates all chances of a December rate cut, unless a case of significant systemic risk returns to markets.
Ashraf Laidi Chief FX Analyst CMC Markets US a.laidi@cmcmarkets.com
