The U.S. dollar stabilizes its broad selling as currency flows shift to unwinding of carry trades, which weighed primarily on the higher yielding Aussie, Kiwi and sterling to the benefit of the yen and the Swiss franc. Yen dragged the dollar below the 103 level to a three-year low of 102.60, while sending sterling under the 204 level for the first time in two years. The Swiss franc is also rallying significantly, dragging the rallying euro to a two-year low of 1.57 francs. Yet it is the yen that is getting the best of the franc, as CHF/JPY hits a one-week low at 98.81.
These aforementioned developments do not mean dollar weakness is behind us. Gold has hit a fresh all-time high of $984 per ounce, making the $1,000 a highly plausible event this week, especially in the midst of potentially recession-like U.S. data on manufacturing, services, construction and jobs.
Manufacturing ISM gauged against Chicago’s levels
The 10 am EST release of ISM manufacturing is expected to drop to 48 in February from January’s 50.7, with the focus largely on the employment and new orders indices, both of which fell below 50 over the two prior months. Considering the 68 correlation between the manufacturing ISM and Chicago PMI, traders may be pricing in a whisper number far lower than 48 following the 7-point tumble in the February Chicago PMI to 44.5, which was the lowest in six years. The 13.5-point plunge in the employment index to a six-year low may also augur badly for the ISM report as well as Friday’s labor report.
The services ISM is due on Wednesday, along with the ADP survey on private payrolls, factory orders and the Beige Book. Pending home sales and jobless claims are due on Thursday, followed by non-farm payrolls and unemployment rate on Friday.
Also at 10 am is the January release of construction spending seen down 0.8% from -1.1%, -0.4% and -0.9% in the prior 3 months. The deteriorating picture in construction may also suggest further losses on construction jobs.
The ISM and construction figures will help determine the fate of equity indices and hence the prospect for further carry trade unwinding. Note that the S&P 500 would have posted its fifth consecutive weekly rise had it not for Friday’s 2.7% decline to 1,330. We expect a retest of the 1,300 level as early as mid week, which coincides with the 50-week moving average. A retest of this level may also be accompanied by fresh gains in JPY and CHF across the board.
Yen Powers Ahead, Intervention not in Sight
The 4.5% decline in Japan’s Nikkei-225 following S&P 500s 2.7% loss on Friday stemming from recession concerns in the United States has powered the yen across the board, dragging the USD to three-year lows below the 103 level. Attempts from Japanese officials urging for stable forex moves were shrugged, which raises the key questions as to whether the BoJ will resort to verbal intervention, which was last carried out in early 2004. The main reason Japanese officials have stayed away from intervention is avoidance of accusations of a double standard, as the industrialized world has largely criticized China on its interventionist approach to keep the yuan from strengthening more rapidly. Another reason to the lack of interventions is the fundamental backdrop to the current gains, especially against the USD. Japanese officials have long said the impact of U.S. subprime losses was limited in Japan and praised Tokyo’s ability to stave off the costs of yen strength.
USD/JPY is seen targeting 102.50, followed by 102.20 in event of sub 48 ISM reading, while resistance faces pressure at 103.70, followed by 104.
Euro’s boosted by more positive data
The euro story obtains another fillip from fundamentals after Euro zone February manufacturing PMI remained unchanged at 52.3, while Germany’s PMI rose to 54.3, overshooting expectations of 54.0. Euro zone inflation was confirmed at a record high of 3.2% in February, further reducing expectations of an ECB rate cut.
ECB governing council member Klaus Liebscher praised the anti-inflationary benefits of strong currency indicating a firmer euro has dampened the increase in oil prices, which he called “staggering.”
Most notably, the euro did not budge after IMF Managing Director Dominique Strauss-Kahn, and former French finance minister, said the euro was overvalued and that “its problems partly reflect the fact that the European Central Bank is "overpowerful.”
We expect resistance acting on 1.4840, followed by substantial selling at 1.4870. Interim target stands at 1.4770, followed by 1.4740.
EUR/CAD: EUR/CAD is up 2¢ (200-pips) from last week’s bullish charts strategy. Technicals indicate a trendline resistance at 1.5060, which we expect to be breached in the aftermath of tomorrow’s Bank of Canada interest rate decision, expected to produce 25 basis points. Interim resistance stands at 1.5050, followed by 1.5110. Support stands at 1.49.30
Sterling remains capped at $1.99
Cable stabilizes after UK February Manufacturing PMI rose to 51.3, overshooting forecasts of 51.0. While higher yielding currencies such as AUD, NZD and GBP remain the least attractive plays against the USD during unwinding of carry trades, GBP ranks highest in this league due to the combination of prolonged weakness in housing data, banking sector and the long term implications of the Treasury’s tax crackdown on non-domicile residents. A sub 48 figure in ISM is seen propping the pair at $1.9800, eyeing interim target at 1.9850, followed by $1.9890. Support stands at 1.9830, backed by 1.9790.
Aussie awaits key sales data
The combination of further stock market losses and the possibility of a disappointing retail sales figure this evening (7:30 pm EST) may extend Aussie’s losses to as low as 92¢. Aussie retail sales seen matching December’s 0.5% increase, while Q4 trade balance (also sue at 7.30) is seen at A$ -17.9 billion from -15.9 billion. A widening in the deficit coupled with sub 0.5% sales growth ay likely weigh on the Aussie on the argument of risk appetite and weaker fundamentals seen easing the case for RBA hike. But the Aussie is also notorious for sharp moves following stronger than expected data.
Trend lime support stands at 92.50, followed by 92.20, while upside seen capped at 93.80 and 94.20.
AUD/GBP and AUD/CAD remain robust candidates for posting steady rallies in event of positive sales showing.
Ashraf Laidi
Chief FX Strategist
CMC Markets US
a.laidi@cmcmarkets.com
