The 0.1% increase in U.S. retail sales was somewhat better than the flat figure expected by consensus, and followed an upward revision in the February figure to -0.4% from -0.6%. Core sales rose 0.1% as expected following a 0.1% decline. Sales of building materials fell 1.6%. The report is unlikely to provide any stability to the latest acceleration in dollar selling, which emerged after the weekend’s G-7.
Dollar weakness has resumed after a brief interruption following a G-7 statement that was largely ineffective in bringing about any dollar stability. The G-7 communiqué on foreign exchange omitted its long standing statement urging the need for markets to reflect fundamentals, and shifted towards expressing concerns about “sharp fluctuations in major currencies”, which is a clear reference to the falling dollar. But the shift in language towards apprehension about excessive currency moves was as promiscuous as the G7’unwillingness to engage in coordinated intervention to support the falling dollar, which is seen as the only viable means of any dollar support.
The euro is now surging to session highs at $1.5880, powered by remarks from the European Central Bank’s (ECB) Yves Mersch indicating there was no room for interest rate cuts in 2008. The dollar’s woes are compounded by not only the ECB’s renewed commitment to fight inflation, dampening any prospects of a rate cut, but also by the fact that the U.S. recession is being complemented by an earnings recession as the season is being kicked off by an earnings miss and negative guidance from General Electric. The latest negative releases came from Wachovia, as the U.S. fourth largest bank reported a surprise Q4 loss and a 41% reduction in its dividend.
Euro passes G-7 obstacle, eyes $1.5930
The euro is being bid up across the board on a combination of broad USD weakness and the ECB’s reiteration that inflation remains its policy priority. The fact that the ECB has not retreated an inch of ground from its price stability stance at the G-7 as a possible way to ease its recent strength is adding to the currency’s strength across the board. The other side of the EUR/USD coin has been fortified by U.S. earnings, where “earnings and warnings” may give a double punch to the greenback and reduce risk appetite across the board.
A positive surprise in U.S. retail sales may have to come in at nearly 0.4-0.5% in both the headline and the core for the euro to encounter pressure at the $1.5925-30 resistance. But support has firmly risen to $1.5780 and 1.5740.
Euro focus turns to Tuesday’s ZEW survey for the latest on German investor sentiment, which has held up spectacularly in the face of the current credit crisis.
EUR/GBP reclaims the 80 pence barrier but is unlikely to breach above 0.8025 in the session following today’s record 20.4% annual jump in March PPI following a 10.9% in February. Support is expected to hold at the key trend line of 0.7920 at which point substantial interests in seen in the single currency.
Yen uptrend intact
Yen’s uptrend remains intact against all the major currencies, with USD/JPY, AUD/JPY, GBP/JPY and EUR/JPY facing increasingly adverse conditions on the technical set up. Yen fundamentals remain boosted by the repetitive failure of U.S. equity indices to breach above their 1,380 and 12,770 barriers in the S&P500 and the Dow. Friday’s GE earnings report has bolstered the case for yen bulls, rendering the 100.30 as the main short term objective, a breach of which is expected to encounter support at 100.00. Upside remains at 101.70, followed by 101.
AUD/JPY and CAD/JPY are also seen extending losses in the event of a negative U.S. retail sales reading, with AUD/JPY capped at 93.40, eyeing 92.40 and CAD/JPY to target 97.70 and 97.40. Resistance stands at 97.45-50.
Sterling propped by 20.4% PPI rise, targeting $1.9920
We do not consider sterling’s gains on the back of today’s record 20.4% annual jump in March PPI as a long-term positive for the currency, considering the need for the Bank of England to further cut interest rates to tackle the deepening slowdown in housing, manufacturing, consumer demand and credit market uncertainty. Tuesday’s release of UK march CPI is seen up 2.6% from 2.5%, which would be another positive element for the currency, but also as an opportunity for shorts to reenter the fray.
Upside momentum is seen extending at $1.9920, a breach of which is unlikely. Subsequent resistance stands at 1.9950. Support starts at 1.9820, backed by 19750.
Ashraf Laidi
Chief FX Strategist
CMC Markets US
a.laidi@cmcmarkets.com
