Yen weakens across the board in an otherwise quiet Monday session in Forex as markets await this morning’s release of the U.S. report on January existing home sales (Down .4%). Risk appetite rises across the board on the back of Friday’s late session rally in U.S. equities prompted by talk of a bailout for struggling bond insurer Ambac. The only fresh news out of the weekend is talk of a possible $3 billion capital injection from German bank Dresdner as part of a rescue plan for Ambac. We remind that the combination of lack of data and comforting statements has proven to be a positive, albeit temporary combination for risk appetite and equities, only fur these gains to dissipate on the release of economic data. Recall the dollar sustained broad declines late last week following the Philly Fed index tumble to 7-year lows for the second consecutive month and the Federal Reserve’s worse than expected downward revisions for growth and unemployment. The 10 am EST release of U.S. existing home sales was not as weak as the expected down 1.6% in Jan to 4.81 million after a 2.2% decline in Dec. Considering the weak momentum in the euro, a decline of no more than 2% may send the single currency lower below the 1.48 figure as it may not be deemed weak enough to boost interest in the currency. The rest of the week’s key U.S. data/events are Feb consumer confidence (Tuesday), Jan new home sales and Fed Chairman Bernanke’s testimony to the House (Wednesday), Q4 preliminary GDP and weekly jobless claims (Thursday) and Dec personal income, core PCE prices and Feb Chicago PMI (Friday). Euro’s Serious Case of Failed Momentum The euro gets off to a weak start for the week, drifting towards the $1.48 figure from Friday’s 1.4862 high, which was also the highest level since Feb. 1. It is worth calling into attention the euro’s relatively rapid pullbacks each time the pair hits a multi-week or multi-month high. This was demonstrated on February 1st when an unexpected decline in U.S. payrolls sent EURUSD to a 10-week high of 1.4955 before closing a 1.5 cents off its high on the day. Other similar days were Feb 11, 12 and 19th. Despite stronger than expected PMI figures and dismal U.S. economic data, the euro’s failure to retain and build on its gains maybe case of weak technical factors, which could be exasperated by negative fundamentals.
Tuesday’s release of Germany ’s IFO business sentiment survey may act as the fundamental catalyst to prolonged losses. The 4 am release of the IFO is expected to show a retreat in the climate survey index to 103.0 from 103.4, and a decline in the current assessment index to 107.3 from 107.9. A decline of no more than 1.0% in today’s US new home sales releases may weigh on the euro. We expect resistance acting on 1.4840, followed by substantial selling at 1.4870. Interim target stands at 1.4770, followed by 1.4740.
EURJPY: The pair broke above the key 159.45 resistance to a 5-week high of 159.86 largely due increased risk appetite stemming from a potential deal to prevent Ambac from being downgraded. Euro weakness is expected to reemerge and drag the cross pair towards the 159.30s, followed by 159 and 158.70. Upside seen capped at the previous support of 160.
Yen Slammed by Ambac Talks
The yen is assaulted across the board as markets obtain a shot of confidence from the much anticipated talks regarding a possible bail out of ailing US bond insurer Ambac. With hundreds of millions in US dollars of bonds at risk in the event of a downgrade of Ambac’s credit rating, a successful rescue package is seen as providing a durable dose of confidence to the markets. USDJPY tested the 108 figure before pulling back towards 107.50s. It would take for a decline of more than 2.5% in US new home sales to prevent USDJPY from retesting the 108 figure. Resistance stands at the 108.25 trend line resistance. Support stands at 107.30, backed by 107.00.
Sterling Capped at $1.9710
Sterling was caught up in mixed data of weak housing and higher lending. The Hometrack house price index showed a 0.2% decline in the month ending in February, translating into an annual increase of 1.4%, the lowest pace since April 2006. Meanwhile, BBA Loans for House Purchase: rose to 44,288 from 42,088 last month.
Sterling ’s sharp Monday gains are seen tempered at the $1.9675 trend line resistance, a break of which will likely fail at the 50-day moving average of 1.9700. Cable’s 50-day MA was last tested in Dec 12, 2007. Support stands at 1.9660, followed by 1.9630.
Ashraf Laidi Chief FX Strategist CMC Markets US 140 Broadway, 30th Floor New York , NY 10005 Email: a.laidi@cmcmarkets.com
