The New York Fed’s Empire index dropped to -11.72 in February from 9.03, versus expectations of a 6.5 reading. Both employment and new orders components fell below zero, while prices paid rose to 47.37 from 40.24. Most notable about this release is that the NY Empire series have proven consistently more resilient than the national ISM survey, Philly Fed and Chicago PMI.
Yesterday we saw the advantages of a weaker dollar in the decline in the U.S. trade deficit while today we see the inflationary implications through the 1.7% increase in January import prices (0.6% ex petroleum). The annual increase was 13.7%, the highest since 1982.
45-day Notice for Redemptions May Strike Again: Today marks the last day of the 45-day period by which clients of some hedge funds are required to give notice to withdraw their money. This was valid on Aug. 15 and Nov. 15 when markets sold off aggressively in each of those days. As of Aug. 15, the S&P 500 was down nearly 5% since the beginning of that quarter, prompting many clients to draw money off the table, which led to hedge funds’ selling and triggered a 1.5% decline on that day. On Nov. 15, the S&P 500 was down 5.7% as of the beginning of Q4, producing a 1.4% decline on the day. As of today Feb. 15, S&P 500 is down 9.2% since the beginning of the quarter, which will likely trigger clients’ notices, prompting funds to sell. The S&P 500 and Dow may shed 1.7% to 2.0%, or as many as 25 and 180 points respectively today. Accordingly, falling risk appetite may trigger broad rallies in the yen against selected high yielding currencies such as the NZD, CAD and GBP to come under renewed pressure.
The 9:15 am EST release of industrial production is expected to show a 0.1% rebound partly due increased utility output following 0% and 0.3% in December and November, but manufacturing is expected down 0.1%. Capacity utilization is seen unchanged at 81.4%.
Euro attempts close above $1.47 EUR/USD pushes higher despite the rise in Euro zone current account deficit. But the 1.9% annual increase in French nonfarm payrolls and a 4.4% annual increase in Spanish inflation for January is keeping the bears at bay. Germany’s finance minister said the financial market crisis may last throughout the year 2008, but sees no signs of recession in his country. None of the Euro zone politicians is demanding any economic stimulus for Germany or Europe, despite calls from the IMF supporting fiscal relief.
Euro’s rebound past 1.4660 near the 1.47 figure should be scrutinized on whether it will close above 1.47, in which case it could suggest prolonged strength next week. Failure to close above 1.47 raises the odds of a subsequent pullback to as low as 1.4580.
We continue to remain bearish EUR/AUD on expectations that a 25 basis point rate hike by the Reserve Bank of Australia to 7.25% next month and escalating inflation expectations. While these expectations are bullish for Aussie across the board, our choice against the euro is backed by the recent euro bounce, which we deem unsustainable in light of increased signs of slowing in the region. EUR/AUD has already fallen from last night’s 1.62 to 1.6120 and is expected to test 1.60 support, followed by 1.597.
Further yen gains expectedYen posts broad gains versus the majors, dragging USD/JPY by 100 points to 107.50 as global equities come under pressure following Bernanke’s reiteration of further deterioration in the US housing and labor markets. Risk appetite traders are ignoring talk of a Japanese recession, especially after yesterday’s release of stronger than expected Q4 GDP. Interim support stands at 107.20, followed by 106.60, especially in the event of a negative reading in U.S. Industrial production. Upside capped at 107.90.
A possible extension of equity losses is seen shedding further declines in AUD/JPY and GBP/JPY to 97.00 and 210.50 respectively.
Sterling eyes 1.9580 Sterling charts a broad retreat on a combination of a pullback in equities and profit-taking in a currency expected to sustain at least 75 bps in rate cuts this year. The inflation rhetoric of the Bank of England (BoE) is deemed as a temporary booster of the currency and an opportunity for the bears to target selling against all currencies. CAD may be the only pair against which GBP could fare relatively better due to the widely expected easing from the BoC. Expect losses to stabilize near 1.9560. Upside seen capped at 1.9640.
Ashraf Laidi Chief FX Strategist CMC Markets US a.laidi@cmcmarkets.com
