Yen rises across the board as financial markets shift to defensive mode after General Electric reported a 6% decline in first quarter profits and lowered its 2008 guidance. The fact that the world’s third largest company has disappointed on both actual earnings and projections is likely to reduce risk appetite for the day, thus further boosting the low-yielding yen and franc at the expense of the higher-yielding currencies. Losses may extend further as the start of the earnings season will likely usher in similar despondent reports from similar conglomerates We also may see a broad retreat in the dollar rather than declines in the higher-yielding Aussie, Kiwi and sterling, as has become the case over the last few weeks.
While the notion of U.S. dollar turning into a funding currency (low-yielding instrument for carry trades) has been knocked around for the past four months, the materialization of such a phenomenon is being increasingly witnessed in global currency markets, as was the case throughout this week. This week’s record highs in the euro at 1.5912 may have occurred on the back of new record high in oil but the
The G-7 meeting starting today and running into the weekend will be notably characterized by a wide menu of suggestions and recommendations on alleviating the unfolding losses in banks and containing the macroeconomic fallout from current market turbulence, but is unlikely to have any tangible impact on financial markets. Aside from the current crisis in credit markets and the unofficial recession in the United States, the distinct aspect of this week’s G-7 meeting is the apparent dissent between the IMF, under the new leadership of Dominique Strauss-Khan, and the United States regarding the projected slowdown of the U.S. economy and the solutions to supporting troubled banks.
In currencies, there are very few novelties the G-7 finance ministers and central bankers can introduce in the way of remarks besides the adopted mantra that excessive currency movements are undesirable. European Central Bank (ECB) President Jean Claude Trichet and his colleagues are expected to reiterate that importance of a strong dollar. The futility of this rhetorical policy has already been cemented beyond FX trading circles and its restatement will only pave the way for further dollar weakness in the medium term, as the Federal Reserve is forced to cut interest rates again this month by at least 25 basis points.
Yen posts gains as markets fear GE
Yen diligently displays its role of safe haven beneficiary as the GE news equity markets on the defensive, with the rationale that the world’s third largest company’s results in the face of the current adverse environment will trigger similar weakness from other corporate reports due over the upcoming four weeks of earnings. We expect yen bias to resurface, dragging USD/JPY towards 100.80, followed by 100.40. In the event that U.S. stocks intensify their losses (more than 2.5%) we’re likely to see a retest of the 100. Upside capped at 101.40, followed by 101.70.
AUD/JPY has already dropped by more that 60 pips to 93.80 and is expected to extend losses towards 93.60 until encountering the 93.20 trend line support. Upside capped at 94.30.
Euro eyes 1.5880s
While the euro is expected to join the other currencies’ decline against the yen following the disappointing GE earnings, EUR/USD is apt to amass fresh gains, targeting an interim resistance at $1.5855, followed by 1.5890. It will be challenging to breach the 1.59 figure again today as traders display cautiousness ahead of the upcoming G-7 meeting. Support seen climbing to 1.58 and 1.5770.
EUR/GBP treats near its latest record high of 0.8030 and could extend potentially prolong its ascent towards the 0.8050s as the pound is expected to chart a prolonged decline into the rest of the quarter.
Sterling’s consolidation to slip lower
While we reiterate our generally negative outlook for sterling, today’s GE news may only slow the currency’s declining momentum. Yesterday’s Bank of England rate cut was widely expected, yet we stick with the call made last December projecting UK rates to reach 4.00% by year end. Any GBP rebound on the back of USD weakness is seen as a viable entry opportunity for GBP shorts. Support starts at 1.97, followed by 1.9660. Any intraday gains are seen facing pressure at 1.9770.
Ashraf Laidi
Chief FX Strategist
CMC Markets US
a.laidi@cmcmarkets.com
