Yen weakness and euro strength dominated throughout the European and Asian sessions as risk appetite further picked up after markets welcomed the Bush stimulus package and reports that billionaire investor Wilbur Ross was in talks to buy out troubled bond insurer Ambac. The company is among a few of the struggling U.S. mortgage bond insurers estimated to require as much as $200 billion in capital injections in order to maintain their AAA credit ratings. New York regulators’ insistence that Warren Buffet provides a helping hand in the bond insurance business highlights the dangerous implications to U.S. investment banks holdings whose bonds are insured by downgraded insurers.
The euro’s broadening strength remains manifested by the currency’s positive correlation with rising risk appetite as ECB officials maintain an increasingly united hawkish tone, despite reports of a possible dissent inside the Bank. Whether Societe General’s $7.11 billion trading loss was a result of one trader’s fraudulent activities or a broader miscalculation by the bank, the euro remains unfazed by the biggest trading loss in banking history as the ECB is considered among the last central bank to allow its independence be swayed by a fraudulent operations or pressure from politicians. Nonetheless, we remain cautiously bearish euro in the medium term. See more below.
Improved risk appetite coupled with expectations for at least a 50 basis point reduction in the dollar’s rate foundation has sent gold to a fresh all-time high of $923.50 per ounce. Rising gold prices are closely tracking the decline in the dollar as next week’s Fed rate cut will drag the dollar’s rate disadvantage relative to the euro and the Aussie at a four-year high. We reiterate our calls for $990 gold later this quarter to be propped by further declines in real global interest rates.
More short-term yen weakness
We expect yen weakness to prolong into the U.S. session amid rising risk appetite ahead of another dosage of easing from the Fed next week. Monday’s State of the Union speech from pres Bush will likely finalize the details on the spending-oriented tax package. The lack of U.S. data combined with improved sentiment is likely to lift the pair past the 107.80 resistance and onto 108.20. Further gains in Wall Street are possible amid the lack of economic data and talks of capital injections and buyouts aimed at shoring up struggling entities. Next week’s Fed decision and U.S. payrolls will take center stage, with a 50 bp rate cut the more likely possibility.
Markets will be watching whether the recent declines in jobless claims are to be reflected in the January payrolls. Stock watchers will gauge the 1,375 target in the S&P today as the next resistance level. Support seen rising to 107.
Euro eases on data, but ECB remains firm
The euro moved off its highs on falling French production outlook to -4 from 3 and rising Spanish unemployment to 8.6% in Q4 versus expectations of 8.3%. The resignation of Prime Minister Prodi following his failure to win a vote of confidence in the senate may be playing a role in the currency’s retreat. But renewed calls from ECB’s Weber that the risks of rising inflation will accelerate “undoubtedly.” Rising gold prices are closely tracking the rally in the euro as next week’s Fed rate cut will drag the dollar’s rate disadvantage relative to the euro to a fresh 4-year high.
Euro declines are seen stabilizing at 1.4660, while the upside targets 1.4730. Key resistance stands at 1.4760.
Our calls for EUR/JPY to breach 158.40 were realized in the Asian session as the pair extended gains to 159.10. After a brief a pullback to 157.80, we anticipate the pair to retest 158.90.
Sterling exploits USD weakness
Sterling joins the euro rally versus the dollar as traders focus on next week’s Fed rate cut, which will bring the month’s rate cuts to a remarkable 125 bps. Sterling bears will have to stand back as the dollar’s yield foundation comes under assault by the central bank. Prolonged equity gains carry the potential to lift cable to as high as 1.9880. Key resistance stands at 1.99, which is the trend line extending from the all time high of Nov 9. Support stands at a.1.9820 backed by 1.9770.
USD/CAD lifted by soft CPI
USD/CAD gained ground after Canada’s core CPI rose came in at 1.5% last month, well below the expected 1.7% and the Bank of Canada's 2% target. Nonetheless, prolonged gains in Wall Street are seen offsetting the rally in USD as was the case yesterday. We do warn that USD/CAD may push back to as high as 1.0220 early next week in the event that the pair closes above 1.0070 today. We expect upside to emerge 1.0140 for the day, with resistance standing at 1.0180.
Ashraf Laidi
Chief FX Strategist
CMC Markets US
a.laidi@cmcmarkets.com
