Gold and oil prices are testing the $900 and $90 respectively after the dollar extended its rebound despite the decline in payrolls. While the December payrolls and unemployment rate were both revised favorably, the dollar rebound was partly attributed to sharp losses in sterling and position squaring in the euro. Tonight’s Reserve Bank of Australia interest rate decision (10:30 pm EST) is widely expected to lift rates to a 12-year high of 7.00% from 6.75%. The Aussie is also fuelled by Chinalco’s $14.5 takeover bid for Rio Tinto, seeking to destabilize BHP’s offer. Both developments are pushing the Aussie to three-month highs vs. the EUR and USD. The Aussie is testing 11-year highs against the British pound whose interest rates are expected to be cut this Thursday to 5.25% from 5.50%. We continue to favor AUD/GBP as our top plays of 2008, which is up 3.8% YTD.
Risk appetite is in a tug of war between M&A announcements on one side and the threat of downgrades in the bond insurers on the other. Economic data will take a step back to the central bank decisions from the Australia, UK and ECB, with the latter possibly propping the euro on Thursday via another hawkish press conference. The question now is whether last week’s 5% rebound in the S&P 500 fits in the definition of a dead cat bounce amid the threat of further corporate warnings and downgrades from the credit rating agencies.
The 10 am EST release of U.S. factory orders is expected up 2.4% in Dec from 1.5%, which would be another positive for U.S. manufacturing following Friday’s recovery in the ISM above 50.
Aussie boosted ahead of rate hike
The RBA is expected to raise rates to a 12-year high of 7.00% from 6.75% as part of its campaign to bring inflation below 3.0%, which is well above the preferred 2% target. The Aussie is also fuelled by Chinalco’s $14.5 takeover bid for Rio Tinto, seeking to destabilize BHP’s offer for the company. Both developments are pushing the Aussie to three-month highs vs. the EUR and USD.
The 7:30 pm EST release of Dec retail sales is expected to show a slowdown to 0.6% from 0.8%, which may draw fresh bids on the retreat ahead of the RBA decision.
AUD/USD has broken the key resistance of 0.9060, eyeing the 0.91 figure. Australian interest rate announcements have moved the currency by as much as 40-50 pips in less than five minutes, which means the pair may push towards 0.9140. Another positive day in Asian stocks should further grease the wheels of the Aussie rally and may call up 0.9155. In the unlikely case that the RBA holds rates unchanged, we can see the pair falling to as low as 0.8940.
AUD/JPY expected to test the previous low of 97.70, with key resistance looming at 98.20.
The Aussie is testing 11-year highs against the British pound whose interest rates are expected to be cut this Thursday to 5.25% from 5.50%. We continue to favor AUD/GBP as our top plays of 2008, which is up 3.8% YTD.
Yen Weakness Nears Support
USD/JPY testing the trend line resistance of 107.10, which is also the 61.8% retracement of the move from the Jan. 25 high to the 105.74 low. With markets propped by M&A announcements and the S&P 500 targeting the key 1400 figure, USD/JPY may sustain fresh momentum towards the 107.30s. We expect continued consolidation to linger within the 106.20-107.40 range. Renewed funding pressures in the LIBOR market may weigh on the pair as the market rate pushes higher. USD/JPY support starts as low as at 106.30, backed by 105.80.
EUR/USD Seeks to Regain 1.4870
The euro’s failure to sustain its post-payrolls gains is resounding negative for the currency-albeit the down move was attributed to less fundamental factors. But as we saw in last month, this week’s ECB press conference may prop the euro anew, as Jean Claude Trichet emphasizes the inflationary risks. Recall the euro had made significant run-up in last month’s conference when Trichet reaffirmed the bank’s alertness towards inflation. Wage settlements in Germany continue to preoccupy the inflation hawks in Frankfurt. Tomorrow’s Euro zone releases on PMI services and retail sales should further define the tone for the pair.
EUR/USD faces resistance at 1.4840, followed by 1.4870. Another positive reading in U.S. factory orders may drag the pair down to the 1.48 figure, but support seen holding at 1.4770.
Sterling rebound seen fading
Sterling’s rebound runs fades under $1.98 and is expected to turn into renewed losses towards the 1.97 figure. UK January Construction PMI fell to a 16-month low of 53.9 last month from 56 undershooting expectations of 55.0. Although the Shadow MPC of the Times voted five to four for a rate cut this week, we expect today’s decision to be less contested in favor of a rate cut, which we expect to trigger further losses to 1.9660. Upside capped at 1.98
Ashraf Laidi
Chief FX Strategist
CMC Markets US
a.laidi@cmcmarkets.com
