Anti U.S. dollar factors are stacking up, with record highs in $105.90 oil and $992 gold, as well as the Bank of England’s (BoE) decision to hold rates unchanged adding to the losses. All eyes shift to the ECB press conference (8:30 am EST) and bank President Jean Claude Trichet’s insights on the surging euro. We expect Trichet to pay extra care in jawboning the euro’s strength in order not to risk provoking substantial declines in the currency, which would accelerate importing inflation via surging oil. The more likely outcome would be for Trichet to reiterate the strong dollar policy, while possibly reiterating the generic statement that excessive currency moves are always undesirable.
Jobless claims fell by 24,000 to 351,000 from revised 375,000 territory or drops to its expected 360,000, but the continued claims jumped to their highest level since September 2005. This will be positive news for the yen, especially against the Canadian dollar following negative building permits. While the relationship between monthly payrolls and weekly claims had weakened over the past year, the last eight weeks have seen a re-coupling as payrolls have regained their upward tone.
January pending home sales are expected to have dropped 1.0% in January following a decrease of 1.5%, 3.0% in the prior months.
Fed speeches from NY Fed’s Geithner (1pm), Boston’s Rosengren (7.30 pm) and St. Louis’ Poole (8pm) will provide only passing interest now that the Fed Chairman Bernanke has allowed the door open for as much as 75 basis point (bp) rate cut. Accordingly, the 10-year/two-year spread has widened to 200 bps reflecting expectations of at least 100 bps in rate cuts before the end of Q2.
Euro powers to $1.5350
EUR/USD powers to a fresh record high of $1.5347 as Trichet is widely expected to remain passive in the face of the accelerating euro so as not to provoke any unwanted declines. Trichet may focus on the “dollar-side” of the equation by supporting the United States’ strong dollar policy. But we reiterate that each time EUR/USD broke above the key figures; $1.20, $1.30, $1.40, it had continued rallying for the following straight three to four weeks before retracing. This leads us to believe that last week's breach of $1.5000 may signal $1.5500 by next week. Fundamentally speaking, this is all too possible on expectations of at least 75 bps easing by the Fed on March 18.
Separately, German manufacturing orders fell 1.5% January following a revised 1.7% decline, versus expectations of a modest rise. Support seen climbing towards 1.5260, and onto 1.5290. Today’s upside may extend to as high as $1.5380, but we suspect that Trichet may try to sound a little more forceful regarding the currency as he may be aware of the potential risk of an overshoot in the aftermath of Friday’s US jobs figures.
EUR/CAD: Euro likely to reclaim 1.5110, followed by 1.5150 amid data releases from Canada (see below for Canada’s releases), with support climbing to 1.5030.
JPY regains footing amid credit worries
Renewed worries with Ambac’s future finances as well as negative developments with U.S. mortgage companies triggered fresh gains in the yen, which makes the credit story and the resulting moves in equities as the primary movers in the Japanese currency. Increased likelihood that the S&P 500 will breach below the 1,300 level and retest the January lows should drag USD/JPY below 103.20 and onto 102.80s. Upside potential for the pair seen testing 103.60, followed by 103.90-104.00.
GBP gains on BoE, USD woes
Sterling’s upward momentum was further accelerated after the Bank of England held rates unchanged at 5.25% as expected. UK house prices fell 0.3% last month according to the Halifax price measure, translating into a 4.2% annual increase over a three-month basis—the slowest pace since October 2005. The figures are in line with most other house price measures showing three to four consecutive monthly declines and the slowest annual pace in three to four years. But surging inflation continue to act as a signify ant obstacle to the BoE, thus, likely causing the central bank to resort to easing rates each quarter.
Ashraf Laidi
Chief FX Strategist
CMC Markets US
a.laidi@cmcmarkets.comOffices
