The U.S. dollar remains on the defensive in the aftermath of yesterday’s Philly Fed survey, which fell to 7-year lows for the second consecutive month. The report came one day after the Federal Reserve downgraded its outlook on growth and unemployment to levels worse than most economists had anticipated. Reinforcing the dollar decline was a stronger than expected report on Eurozone services, which reduced the likelihood of an ECB rate cut. The contrasting picture between these two large currency blocs is pushing gold to $950 per ounce, just below last night’s all time high.
EUR/USD at 2 1/2 week Highs
The euro extended gains further against the beleaguered dollar after a preliminary estimate of the Eurozone’s services PMI rose to 52.3 in February from 50.6 in January, beating estimates of 51. The reported overwhelmed an earlier release showing Eurozone factory orders down 3.6% in December, the worst level in seven years in December.
Euro strength is accumulating versus the dollar and sterling but faltering against the yen amid broadening global equity losses. Although markets have priced in lower Eurozone GDP growth in 2008 to 1.8%-1.6%, the possibility of a hold in ECB rates throughout the year is not priced in, which could help the euro across the board. This explains our rationale intermediate retreat in the currency towards $1.42-43 before a subsequent rebound towards $1.55 later in the year.
EUR/JPY’s struggled below 159 to as low as 158.53 amid talk of a failed hedge fund in the U.S. and equity market declines in Asia and Europe. EUR/JPY recovery is seen dissipating at the 159.40 level, which is just below the 38% retracement of the Dec. 28 high to the Jan. 22 low. Bias remains weak, with preliminary support at 158.40, followed by 158.
Loonie Drops on Falling Core Sales Loonie drops across the board after Canada’s core retail sales (excluding autos) fell 0.4% in December, undershooting expectations of a 0.3% increase, following a 1.7% jump in November. The headline retail sales figure matched expectations, rising 0.6% from 0.9% in November (revised from +0.7%). Considering last week’s soft inflation figures and today’s weak numbers, the debate may turn towards the magnitude of the anticipated easing by the Bank of Canada on March 4. We see a 60% chance of a 25-bp rate cut to 3.75%.
USD/CAD is expected to extend gains towards 1.0170, followed by 1.0120 especially if equities prolong their declines today. Support crops up to 1.0080.
We noted in yesterday’s video commentary found on your CMC+ Platform that EUR/CAD was set up for breaching above the 1.5 figure onto 1.5050 from 1.4990. 1.5080 remains key target into next week, with resistance standing at 1.5120.
Yen Propped by Equity Loses
Broadening losses in global equities and news that New York based hedge fund AQR is facing liquidation requests from its clients following a 25% decline last month is weighing on risk appetite to the benefit of the Japanese currency. Yen gains have broadened in the Asian session. USD/JPY faces a break of 107, and support at 106.60. Upside remains capped at 107.40.
GBP/JPY is seen posting limited gains at 211.50, followed by 212.10. But falling confidence in the muni-auction bond market and talk of hedge fund liquidations will raise the vulnerability of the GBP/JPY carry trade. We expect a retreat towards 210.30, followed by 209.70.
Ashraf Laidi Chief FX Strategist CMC Markets US 140 Broadway, 30th Floor New York , NY 10005 212.644.4220 Email: a.laidi@cmcmarkets.com
