The Philly Fed survey improved to -17.4 in March from -24, the lowest since February 2001, but remains negative for the fourth straight month. The new orders index stands at -9 from -10.9, posting its third negative figure for the third straight month.
The leading indicators index fell 0.3%, posting its fifth consecutive decline as the 10-variable index reflects the broadening slowdown in the U.S. economy.
The latest reading of U.S. weekly jobless claims showed a 22,000 increase to 378,000 last week, vs. expectations of a 3,000 rise. This was highest level since October 2005, while continuing claims rose to their highest since 2004. The current deterioration in jobless claims is further confirmation of recession, but the NBER-- body in charge of officially calling recessions has yet to continue determining the beginning of the downturn, which we expect to have begun in December 2007.
The dollar’s broad gains emerge as prolonged global equity declines trigger further reduction in risk appetite, prompting speculators to take funds off the table from rallying commodities. Whether it is profit taking in commodities or simply to meet margin calls in tumbling equities, the commodities sell off is occurring to the benefit of the US currency. Gold prices tumble more than $115 per ounce to $905 per ounce, on its way to make its biggest weekly decline in 25 years. Oil prices fall by more than $7 per barrel towards the $100 level.
The commodity currencies (CAD, AUD and NZD) are the biggest losers during the current phase of falling commodities, which is negative for equities. The fact that this is a holiday shortened-trading week and today is the market’s triple witching hour with the expiration of individual an index option and futures contracts suggests that further volatility is ahead today. All markets will be closed for Good Friday tomorrow.
Euro decline is no reflection of European fundamentals The broad euro correction emerges on the heels of de leveraging in credit markets, which is prompting profit-taking in commodities to the benefit of the U.S. dollar. The 2ٕ¢ decline in the euro is no reflection of Euro zone fundamentals, but a sign of resulting unwinding in dollar selling trades, which were dragging the dollar across the board.
Euro zone preliminary Manufacturing PMI fell slowed to 52.0 as expected in March, while Germany’s PMI slowed to a better than expected 54.9.
EUR/USD selling has yet to extend towards the $1.5350 support, which is the 38% retracement of the rise from the Feb 8 low. It is worth noting that the closely watched 50- and 200 day moving averages are at $1.4940 and $1.43, suggesting that further euro erosion is in the works. Subsequent support stands at 1.5280, followed by 1.5255. Upside limited at 1.5470 and 1.5520.
Separately, German MOF: Reiterates that growth dynamics remain strong and sees no sign of a significant consumer spending rebound; price risks are restraining consumer spending; economic dynamism to slow in 2008; and trade will boost 2008 growth.
USD/JPY capped at 100
Yen trading was most active in the crosses as non-USD currencies dropped across the board. But USD/JPY remains relatively modest facing resistance at 99.45 and 99.70. The Philly Fed index may trigger renewed losses in USD/JPY, which may call up 98.80. Key support stands at 98.40. Thinning forex liquidity likely to trigger fresh volatility, thus, we’re likely to see any sharp moves beyond 100 to be followed by equally rapid pullbacks.
Sterling bears the worst of both worlds
The unfolding damage in the British pound is fuelled by a combination of commodity-driven USD gains and deteriorating fundamentals in the UK, underlined by rising chances of a BoE rate cut next month. Late last year we said sterling may become the U.S. dollar of 2008 and this slowly materializing as high UK interest rates have substantial downside ahead. Nonetheless, the current losses are expected to stabilize around the $1.9780, backed by 1.9750. Upside seen capped at the trendline resistance of $1.9850, with further gains seen to taper off at 1.9880.
We expect renewed losses in GBP vs. JPY and EUR, with GBP/JPY targeting 195.50 followed by 1.94.60. EUR/GBP seen stabilizing at 0.7760, followed by 0.7730, before recovering towards 0.7820.
Ashraf Laidi Chief FX Strategist CMC Markets US a.laidi@cmcmarkets.com
