The October CPI rose 0.3% and core CPI rose 0.2%, both as expected, translating into a year on year headline rate of 3.5% (the highest since August 2006, which is a negative for the Fed) and 2.2% in the core rate.
The New York Fed’s Empire State Index continues to defy weakness seen in the national ISM, Chicago, Dallas and Philadelphia PMIs after posting a smaller than expected decline to 27.37 in November following the three-year high of 28.75 in October. The market isn’t giving much weight to the survey as it awaits the more important Philly Fed (due at noon) which commands more attention, as it spans across a bigger industrial area.
The negative news of the morning is the 20,000 increase in weekly jobless claims to 339,000, overshooting expectations of a 3,000 increase.
Today’s news from Barclays, yesterday’s downgrades from Moody’s and the sharp retreat in robust stocks such as Google, Research in Motion and Apple during the last hour of Wednesday trading portend for further equity declines today. In such case, carry trades will be under severe assault, boosting the Japanese yen across the board and the U.S. dollar particularly against GBP, CAD, NZD and AUD.A higher than expected CPI report and downside surprise in the regional surveys (Philly and NY) may also act as catalysts. We repeatedly warned that August 15 could witness sharp declines in equity markets due to the timing of hedge fund redemptions. Finally, the new rules by the Financial Accounting Standards Board (FASB 157) in valuing assets and liabilities marked to market goes into effect today for all banks and may trigger fresh write downs. The renewed decline in gold from $815 to $797 is also a reflection of broader unwinding of carry trades ahead.
At 10:30 am, EIA crude oil stocks are seen falling by 0.8 million barrels to 311.9 million barrels.
At noon, the November Philly Fed index is seen at 6.0 from 6.8. The survey commands significant market attention and can be cataclysmic in an already shaky market. Also watch the new orders index, which fell to 2.7 in October from 15.1 in September.
Sterling extends damage, eyes $2.0370 The latest in negative UK economic data is the 0.1% decline in October retail sales, marking the first drop since January, following a 0.3% increase in September, which was revised from +0.6%. The British pound had already been hit against all currencies with the exception of the U.S. dollar, but the fact that the currency has lost 5¢ since Monday highlights the deepening gloom in the currency. Yesterday’s quarterly inflation report from the Bank of England (BoE) predicted inflation will move back to its 2% target in 2009. Sterling fell as the BoE based its forecasts on the assumption of a 25 basis point rate cut next quarter. The currency damage escalated after BoE’s King said in a press conference that the UK economy will “slow sharply.” We have long pointed out the fundamental weaknesses of the British pound and the contrast between its gains versus the dollar and its losses against all other major currencies.
Cable drops below the key 50-day moving average at $2.0450 and is seen extending losses towards the $2.04 support. Key target stands at $2.0350, which is the 61.8% retracement of the rise from the Sep 18 low to the Nov 9 high. Upside capped at $2.0550 in the event of downside US data but resulting losses in equities may limit cable’s recovery.
We continue to favor EUR, AUD and CHF against the GBP.
Euro resilient during adverse climateThe fact that EUR/USD is not following GBP/USD on the downside highlights the relative superiority of Euro fundamentals to those in the UK and validates the prolonged rally in EUR/GBP to fresh 4-year highs at 71.60 pence. While the pair may power ahead on the back of negative US data (Philly Fed) towards 1.4680, there may be pressure around 1.47 in the event of sharp losses in equities. But the fact that these renewed losses emerge from a US specific theme may limit losses at 1.4610. Key support stands at 1.4580.
USD/JPY eyes 110.20
After 3 days of gains, USD/JPY charts its habitual pullback, with the latest array of credit related losses emerging from Moody’s downgrades and Barclays. The stronger than expected NY Fed index is boosting USD/JPY but the higher than expected rise in jobless claims will maintain the pair capped at 111. Renewed losses were seen testing the 110.50, followed by 110.20.
USD/CAD extends rebound, eyes 98¢ USD/CAD continues its recovery amid the decline in oil prices and escalating concerns expressed by Canadian politicians and central bank officials. Bank of Canada Deputy Governor Jenkins indicated yesterday that Canada bore most of the brunt of US dollar weakness. Renewed equity losses will be positive for the USD/CAD, which is expected to test the 97.70 figure, followed by 99¢. The release of the oil inventory data may impact oil prices but support is seen standing at 96.60.
Ashraf Laidi Chief FX Analyst CMC Markets US
