Yen rises across the board as risk appetite takes a fresh hit following the latest evidence of the sub-prime mortgage spillover on the market and broader economy. JP Morgan Chase’s downgraded the earnings of four of its competitors based on lower higher write-downs and lower M&A revenue. Meanwhile, downgraded and defaulted debt has reached towards state-run pension pools in Connecticut, Montana and Florida, with the latter owning more than $1 billion of downgraded paper.
Yesterday we made the fundamental case for a temporary rebound in the U.S. dollar occurring on the heels of repositioning out of net dollar short positions, which initially favored EUR, GBP, AUD, NZD and CAD. The technical case for a temporary dollar rebound is seen in the following charts of Aussie and gold. USD/JPY remains the exception to the dollar rebound story as the currency is anticipated to post fresh gains on the heels of prolonged equity market volatility.
Failure in S&P technicals pave way for fresh downside
Last week’s rebound in the S&P 500 was as visible as its failure to break above the key 200-day moving average of 1485. The resounding sign of prolonged bearishness (as applicable to any technical chart) is seen not only through three consecutive weeks of trading below the 200-day MA, but two failed attempts to close above the 200 day MA. Fundamentally, the bear case for U.S. equities further validated by the fact that last week’s rally was largely a result of one-off factors, namely: Abu Dhabi Investment Authority’s $7.5 billion purchase of 5% in Citigroup and increased indications by the Federal Reserve officials that a rate cut may be needed at the December 11 meeting.
Shaky Aussie technicals in line with uncertain equities
The Australian dollar may have been supported by a hawkish central bank raising interest rates last month and paving the way for further tightening. But the overnight figures on retail sales suggest the Reserve Bank of Australia may have to remain on hold for at least 2 months in order to assess whether the 50-basis point tightening of the past 2 months combined with the strong currency is beginning to spillover to the economy. Australia’s retail sales rose 0.2% in October from September’s 0.7% increase, undershooting estimates of a 0.6% increase. The report dragged the Aussie by more than half a cent to 0.8730.
We mentioned in yesterday’s video commentary the developing head-and-shoulder formation in the AUD/USD, which is a common bearish reversal pattern. This suggests the pair could prolong weakness towards 0.8730, followed by 0.8670. A breach below the 0.8650 neckline is expected to extend losses towards the 200-day MA of 0.8570.
USD/JPY capped at 110.80
We mentioned in yesterday’s note that USD/JPY was capped at 110.80 and retreat towards 110. Today’s decline towards the 109.60 low may be expected to see follow up moves towards 109.25. Subsequent target stands at 108.30. The main risk to this move is a far stronger than expected non-farm payrolls release this Friday (above 110-120K). A 50-bp rate cut from the Fed next week would also likely boost the pair higher based on an unexpected jolt of risk appetite weighing on the low yielding yen.
CAD Seen Under Pressure Despite BoC
We expect today’s Bank of Canada interest rate announcement (9:00 am EST) to keep interest rates unchanged at 4.50% because not only the loonie has already weakened 11% from its highs over the past 4 weeks, but also the Canadian economy continues to show signs of strength that do not yet warrant an easing. Last week’s release of Q3 GDP showed an expectedly strong 2.9% increase mainly due to robust personal expenditure. The loonies’ decline has been mainly a result of the 13% decline in oil prices and weaker than expected CPI. But the decision to leave rates unchanged at 4.50% may not necessarily be CAD positive, as the BoC will likely maintain its cautious stance in the policy statement, raising its concerns for negative spillover from the United States and the strong loonie.
Nonetheless, we expect the loonie to remain under pressure in light of oil’s weakness. USD/CAD support seen climbing towards 0.9980, backed by 0.9950. Upside seen extending towards 1.0070, followed by 1.0110.
Ashraf Laidi
Chief FX Analyst
CMC Markets US
a.laidi@cmcmarkets.com
