The U.S. dollar pushes higher on a mix of good news from another fall in U.S. weekly jobless claims and dismal news of double digit percentage declines in housing starts and permits. Jobless claims fell 21,000 to 301,000, while the four-week moving average drops off its two-year highs to 328,500. Housing starts tumbled 14.2% to a 16-year low of 1.006 million (expected: 1.145 million) in December while permits dropped 8.1% to 1.068 million (expected: 1.135 million). For 2007, housing starts dropped 24.8%. Especially ominous is the deterioration in building permits as they serve as a leading indicator of future construction activity.
There are two increasingly resounding signs of risk reduction trades overwhelming financial markets:
the persistent ways in which U.S. equity indices close in negative territory or pare their gains significantly in the last 30 minutes of trading;
Asian markets’ shrugging of the rare gains displayed in U.S. markets and;
the prolonged strength in the Japanese yen despite the gains seen in equities, as was the case overnight when the 2.0% rally in Japanese equity indices prevented the currency from weakening. Normally, the yen weakens during rising equity markets (rising risk appetite) as traders and short-term fund managers take advantage of the low yielding yen to make bets in higher yielding currencies, equities and gold.
The 10 am EST testimony by Federal Reserve Bank Chairman Ben S. Bernanke is expected to sound off a similar tone to last week’s speech whereby he expressed the central bank’s readiness to take aggressive steps towards further easing monetary policy. Since today’s appearance will be followed by Q&A from Congress, the testimony will be dominated by Bernanke’s views on the anticipated economic stimulus package to be worked out by Congress and the White House. Considering that the Fed is partially responsible for underestimating the magnitude of the housing recession and its resulting impact on the overall economy, Bernanke is unlikely to give any major objections to any package based on fiscal discipline. Bernanke’s reiteration of the prolonged economic deterioration will likely weigh on commodity currencies but may boost equities on expectations that a rescue package will be unveiled as early as next week’s Presidential State of the Union Address.
The 12 pm EST release of the Philly Fed manufacturing survey is expected at -1.0 after tumbling to -5.0. Two back-to-back months of negative headline figures would be consistent of a recession in the United States.
Yen gains after Merrill loss
After a making brief retreat, the Japanese yen strengthens across immediately after Merrill Lynch reported a second straight quarterly loss and an earnings-per-share loss nearly three times greater than anticipated, including an $11.5 billion write-down to subprime mortgages. Just as equity indices hardly need an excuse to sell off, the Japanese yen is hardly in need of a motive to rally. A better than expected showing in the U.S. data may contain any further gains in the yen - as was the case after yesterday’s unexpected increase in U.S. industrial production – but the prospects of the yen picking up ground on any renewed losses in equities remain the higher probability. We should also note that despite eroding chances of an inter-meeting Fed cut, markets remain disappointed by lack of such action and that they will have to wait until Jan. 30 to obtain the much anticipated 50 basis point easing.
Any gains in USD/JPY following the U.S. data are seen capped at 107.30, followed by 107.50. Tone remains decidedly negative with support standing at 106.70 followed by 106.30. We continue to expect renewed losses in CAD/JPY (104.20 and 103.80), EUR/JPY (156.20) and GBP/JPY (208.80).
Euro seeks solace from United States’ weakness
After making unexpectedly dovish remarks yesterday, ECB’s Mersch stated today the central bank discussed only two options “not three” at last week’s interest rate decision, which means the possibility of a rate cut was not considered. The comments aim at allaying the impact of his dovish remarks earlier, which accentuated the downside risks to growth. The Euro’s decline found stability at our projected support of 1.4765—the trendline support extending from the Dec. 21 low, a break of which may extend towards 1.47 and 1.4660. The catalyst to such moves may be unexpectedly strong U.S. figures on Indus production and housing. An inter-meeting Fed cut is seen propelling the pair to as high as 1.4860.
Sterling gains add to vulnerability
Sterling firmed partly on USD weakness and on rising price pressures in the latest British Chambers of Commerce survey. But the report also showed home orders balance falling to +18 in Q4 from +26 in Q3, the lowest in 1-1/2 years. Cable’s gains on the back of U.S. data are seen limited at 1.9730, followed by 1.9760. The currency’s appreciation versus the dollar makes increases its vulnerability to the current pricing of as many as 75 bps in rate cuts this year. We warn sterling bulls that Friday’s release of UK retail sales, which could act as a trigger for reversing the recent gains in cable. Support stands at 1.9640, followed by 1.9580.
Cable’s gains seen facing resistance at 1.9760, at which point we expect renewed losses especially in the case of selling in equities, Cable eyes support at 1.9640, followed by 1.9580.
Loonie out of favor
The Canadian dollar extends its sell-off on the back of Friday’s bigger unexpected loss in payrolls and decline in Nov trade surplus. Today’s bigger than expected 2.9% decline in November vehicle sales adds to the string of poor data, including last week’s 9.9% collapse in Canadian building permits. Rising odds of a 50 bp Fed cut this month increase the possibility of a 25 bp rate cut by the bank of Canada next week. CAD/JPY had dropped below our projected target of 105.80, reaching 105.69 from Friday’s 106.20. AUD/CAD hit 0.9170 and eyes 0.9220. USD/CAD is seen capped at 1.0230. Support stands at 1.0130, backed by 1.0070.
Aussie foundation stabilizes
Australia’s unemployment rate unexpectedly fell to a 4.3% in December from 4.5% in November, while number of employed people rose by 20.1K, matching expectations. The figures help improve the Aussie’s foundation, especially as we go into next week’s key PPI (Sunday 7:30 pm EST) and CPI figures (Tuesday 7:30 pm EST), which will shed more light on the possibility of an RBA rate hike next month. Of equal importance is Friday’s speech by RBA Governor Stevens due at 9:00 am EST, which will determine the central bank’ s view on the deteriorating market turmoil and whether the RBA will stand pat in February.
Support starts at 0.8800, followed by 0.8760. Rebound remains possible to 0.8850, followed by 0.8880. Further losses may be seen in AUD/JPY especially in event of dismal U.S. data with support standing at 93.60, backed by 93.00.
Ashraf Laidi
Chief FX Analyst
CMC Markets US
a.laidi@cmcmarkets.com
