A relatively rare development is taking place in currency markets as the dollar sells off across the board following the release of the housing starts/building permits. Surging risk appetite usually drives down the dollar across the board with the exception of the yen, but the current price is sending the greenback lower against all major currencies on a combination of prolonged speculation about Mideast currencies breaking away from their dollar peg and the dismal showing in building permits. Although housing starts showed an unexpected 3% rise in October, the 3% decline in building permits is the more concerning figure since permits are the forward-looking indicator. Freddie Mac's latest loss announcement is also contributing to the broad dollar weakness story, as concerns are increasingly perceived to be a U.S. specific problem.
The dollar hit fresh record lows against the euro at $1.4813 and rallied against the yen in European trade after a sudden surge in Tuesday Asian equity trading emerged on a sharp rally taking place in after-hour U.S. equity futures based on rumors of an inter-meeting rate cut. The sharp euro rise was also attributed to prolonged talk of a revaluation in Gulf nations’ currencies. Notably, the abrupt rebound in after-hour Globex equity futures played a key role in triggering a significant reversal in the Nikkei-225, which came back from 16-month lows intra-day to make a 3.1% turn around and end up 1.1% on the day at 15,211. This is not the first time that global stocks abruptly interrupt their downfall due to rumors of an emergency Fed meeting, which highlights the increasingly shaky confidence in investor confidence, especially at a time when the Federal Reserve is increasingly reluctant to compromise its inflation outlook to the benefit of equity markets. The resulting run-up in European equities will likely translate into a rally in U.S. equity futures, especially in the event of some signs of stability in this morning’s U.S. activity data.
The 2:00 pm release of the minutes from last month’s Federal Open Market Committee (FOMC) decision will accompany the newly established forecasts from Fed officials, which will now be four times per year instead of twice. The forecasts will be on real gross domestic product (GDP), headline personal consumption expenditures (PCE) prices and core PCE prices. The importance of these minutes will be highlighted because they will shed more light on the reasoning of Kansas City Federal Reserve Bank President Hoenig’s dissent against last month’s 25-basis point rate cut. In addition, they will also lay out the rationale for the new forecasts on GDP and price growth, which should include an account of the Fed’s emerging priorities regarding the risks to growth, inflation, employment, housing and capital market stability.
Euro eyes $1.4830
The strength of the euro is demonstrated by the fact that even when Asian equities were plummeting overnight (before the jump in U.S. equity futures) and gold prices had tumbled to $773 per ounce, EUR/USD remained relatively robust at $1.4637. Renewed talk of a GCC revaluation emerged when UAE Economy minister was reported by Reuters to saying the government was serious about containing inflationary pressures, adding that a solution would be effective via stability in the U.S. dollar or a change in the currency peg regime. We place the probability of a change in the UAE’s currency system from dollar peg to a basket of currencies as high as 60% at next month’s GCC meeting on currencies. Such a move is seen as a precursor to revaluation, which we expect to take part in Q2.
We expect the single currency to extend gains towards the $1.48 mark and remain capped at followed by 1.4830 figure. Support seen standing at 1.4760. Caution is paid to comments from Euro politicians such as this morning’s remarks from Euro group head Juncker indicating that “benign neglect” must be not be used towards the euro.
Canadian dollar drops on weak inflation
An unexpectedly weak Canadian consumer price index (CPI) reading is now raising the odds of an interest rate cut by the Bank of Canada (BoC). October CPI came in at 2.4% y/y vs. expectations of 2.8%, while the core CPI slipped to 1.8% vs. expectations of 2.0%. Upside seen initially capped at 0.9885, which is a temporary barrier to 0.9950. Renewed equity losses seen triggering the elusive $1.00, especially amid increased chances of a BoC rate cut at the Dec. 4 meeting.
USD/JPY overnight recovery lacks substance
Since the bulk of last night’s recovery in yen crosses resulted largely on unsubstantiated talk of an emergency Fed meeting, we deem these gains to be exploited as a possible entry in fresh yen longs, especially as the deterioration in global risk is expected to continue. Japanese equities had initially been more than 300 points down after Japanese financial minister said there would be no intervention to support equity prices. Renewed reports of weakness in U.S. housing and retail activity maybe some of the sources of renewed losses in equities.
Despite escalating volatility in the yen pairs, the overall trend remains clearly in favor of the Japanese currency. This is demonstrated in the four-hour USD/JPY chart, where the downward channel suggests trend line resistance at 110.80 extending from the Nov. 14 high. Interim support stands at 110.20, followed by 109.80. Key support stands at 109.50.
BoE recovers on CBI, risk appetite, capped at $2.07
After dipping to a four-week low of $2.0350 in Asian trade, the British Pound makes a 3¢ recovery due to a combination of surging risk appetite emerging from the rebound in global equities in overnight trading and unexpected increase in U.K. manufacturing sector. The CBI’s monthly trends survey showed manufacturing orders rose to a balance of 8% in November, exceeding forecasts of -9%, while the price expectations index rose to 21% from 14% in October. The data shadowed renewed evidence of further slowing in U.K. house prices. Remarkably, cable’s 300-point recovery paused at the $2.0660 mark, which is the 38% retracement of the 2.1160-2.0352 decline. We continue to see sterling’s downside risks exceeding those to the upside, renewed loss of global investor confidence is expected to reinforce the shaky fundamentals in the British economy.
A prolonged rally in equity futures is expected to lift the pair past 2.0640, facing interim resistance at 2.0670, followed by 2.07. Support stands at 2.0580, followed by 2.0550.
Ashraf Laidi
Chief FX Analyst
CMC Markets US
a.laidi@cmcmarkets.com
