The charts below confirm the major equity indexes’ failure to breach above moderate technical barriers, which suggests possible downside ahead. The failure of the S&P 500 to exceed more than 3% above its 50-day moving average is now in place. Now that the indexes have failed for the third time to breach above their respective resistance level, marked by green line in the chart below, we expect them to extend declines towards 12,350 and 1,330 in the Dow and S&P respectively. Such retreat in risk appetite will likely cap USD/JPY at 102.50s and trigger fresh declines towards 101.70. More below.
At 10 a.m. is the February forecast for U.S. pending home sales, expected down 1.0% to 84.9 after having been flat in Jan. The year-on-year change is expected to show a decline of as much as 21% following -19.6%, -24.2% and -19.8% in January, December and November respectively.
The 2 p.m. release of the Federal Open Market Committee (FOMC) minutes from the March 18 rate decision will shed more light on the Fed’s decision to opt for a 75 basis point rate cut instead of the expected 100 bp move including the two dissenting votes, but may not offer hints on the magnitude of the rate cut in the April meeting. Despite an apparent stabilization on the systemic risk front, we continue to expect a half point cut later this month due to the unambiguously deteriorating picture on the macroeconomic front.
Sterling breaks key support
One day after we highlighted our case for further declines in the British pound, the currency hits a five-week low, shedding more than two full cents from its $1.9920. We stated our expectation for a 25 bp rate cut this due this Thursday as a fundamental argument. But today’s release of the latest figures on UK house prices has increased the downside momentum in the currency. The March index from Halifax, the UK’s largest mortgage lender, showed a 2.5% fall in house prices, the biggest drop since September 1992 when the pound broke off the ERM in reflection of economic contraction, following a 0.4% decline in February. The annual decline was 1.1%, lowest since December 2002. Last week’s release from Nationwide showed a 0.5% drop in February.
Euro exploits weak U.S./UK fundamentals
The contrast between the escalation of negative news in the United States and UK one one side, and the lack of such news in the Euro zone on the other, is among the fundamental underpinnings of the euro’s resilience. Although the dislocation in Spain’s housing sector is intensifying, Spain is one of 15 countries in the Euro zone, a region that remains offset by resilience in business and consumer strength in Germany and France.
One day after UAE central bank chief Al Suweidi indicated a continuation of the current foreign exchange regime, with no plans drop or revalue its currency peg to the dollar, a member of the UAE’s Federal National Council said today the UAE may still depeg the dirham from the USD as the task force continues to study the benefits of currency regime transitioning. We mentioned yesterday that it is expected for the UAE to not hint at any looming depeg or basket as that would trigger rapid USD declines and complicate the actual task of transition.
Euro is also to preserve its firm tone going into Thursday’s ECB press conference where pres Trichet is expected to reiterate the inflationary pressures as a justification for the current level of interest rates, knocking off the bears to the sidelines. The weekend’s G7 may give cause of concern for any excessive euro moves, but we remind that the G7 faces more pressing concerns than currencies such as market risk mitigation, shaky banking fundamentals and soaring world food prices.
Support stands at $1.5670, backed by 1.5625. Upside capped a fundamentals will maintain the Fed on the easing side for the rest of the year. Upside capped at $1.5740, followed by $1.5770.
USD/JPY weak tone remains the norm
USD/JPY shows why any moves to the upside remain premature despite remarks from the IMF on Japan’s need to pump public funds into the economy. Even the downgrade to the economy by the Government Cabinet isn’t likely to stem the downward tide and renders any gains to 102.40 and 102.80 as selling opportunities in the pair.
The charts below confirm our thesis of the failure in the Dow and the S&P to exceed more than 3% above their 50-day moving average. Now that the indices have failed for the third time to breach above their respective resistance level (marked by green line), we expect them to extend declines towards 12,350 and 1,330 in Dow and S&P respectively. Such retreat in risk appetite will likely cap USD/JPY at 102.50s and trigger fresh declines towards 101.70.
Ashraf Laidi
Chief FX Strategist
CMC Markets US
a.laidi@cmcmarkets.com
