The deteriorating U.S. dollar reaches a new landmark as the currency drops below 100 yen for the first time since October 1995, while tumbling to new record lows against the euro and the Swiss franc at 1.5626 and 1.0040. The sea change in currency markets is underlined by the attainment of quadruple parity, with 1.0000 in USD/CHF, 100 in USD/JPY and the breach beyond 1.0000 AUD/USD and $1,000 per ounce in gold. The latest blow to the dollar and world bourses intensified in early European trade when Carlyle Capital Corp said late Wednesday it expected creditors to seize all of the fund's remaining assets after unsuccessful negotiations to prevent its liquidation. The continued damage in the mortgage backed securities market dealt a blow to Carlyle’s collateral, all of which was AAA rated. Notably, the fact that the fund’s parent company, private equity giant Carlyle Group had failed to successfully provide sufficient capital to lenders not only reflects the speed of the fall in value of these securities, but suggests further similar failures amid other leveraged private equity companies.
Yesterday’s declines in U.S. stocks mean that Tuesday’s unprecedented announcements by the world’s major central banks to inject over $230 billion in security lending failed to have a lasting effect on market confidence beyond one day. Tuesday’s 400-point rally in the Dow was fully reversed the next day, while the S&P 500’s surge from 1275 to 1323 is now reversing back towards the 1290 level in the futures market. Renewed selling in equities will mean broader strengthening in the yen and the Swiss franc as capital surges back to these funding currencies.
Euro breaks $1.56, eyes $1.5670
The euro’s record braking rallies against the dollar and rest of major currencies were partly boosted by the ensuing damage in the greenback and falling expectations of an European Central Bank (ECB) rate cut. Mixed reports from the GCC countries regarding an ending to the dollar-peg continue to favor the euro. The recent strengthening in Euro zone-based has also served to bolster momentum in the euro as it further contrasts the monetary policy and growth outlook of the USD.
With gold probing the $1000 mark, we expect the euro to regain momentum towards the 1.5650 target as the 1000 is expected to be broken on this same day that USD/JPY broke below 1000. Support seen holding at 1.5550 and 1.5520. .
EUR/AUD: Despite the unexpected decline in Australia’s unemployment to an all-time low of 4.0% and the increase in payrolls more than twice the expected 15,000, EUR/AUD has held firm above 1.66, but emerging downside pressure at 1.6670 is expected to reaccelerate downside towards 1.6550. In the event that today’s expected speech from Treasury Secretary Paulson regarding the housing market gives the usual boost to stocks then we may see a rebound past the trend line resistance of 1.6680.
Falling USD/JPY eyes 102.00
The overnight announcement from Carlyle Capital and U.S. stocks’ complete reversal of Tuesday’s Fed-driven liquidity had intensified the broad yen rally due to sharp unwinding of carry trades. Japan’s vice finance minister for international affairs’ attempt at verbal intervention did nothing to stop the yen’s rally. We do not expect the yen to have any meaningful retreat in its latest rally unless Japanese officials either threaten to intervene or carry out the intervention then announce that their actions. Part of the reason for the absence of intervention is the contrast in GDP growth rates between the United States and Japan, with the latter up 3.5% in Q4 and the former up 0.6%, which implies that Japanese officials cannot adopt the same mantra of 2003-4 (last time they had intervened) of indicating that currency moves do not reflect fundamentals.
In the event that today’s expected speech from Treasury Secretary Paulson regarding the government plans to assist home buyers offers a boost to stocks then we could see a temporary rebound in USD/JPY and rest of yen crosses. USD/JPY upside is seen capped at 101.65-70, with substantial downside pressure at 100.90. We expect a renewed attempt to retest 99.95, followed by 99.70.
AUD/JPY: Yen strength is underlined by the 200-point decline in AUD/JPY despite stronger than expected rise in Australia’s February employment figures. We expect a rebound to test 94.80, at which point it will face renewed losses upon a retreat in equities. Support stands at 93.60, backed by 93.00.
Ashraf Laidi
Chief FX Strategist
CMC Markets US
a.laidi@cmcmarkets.com
