The U.S. dollar’s leap to six-month highs against the euro and 17-month highs against the British pound is largely a result of the increased realization that the Euro zone, United Kingdom and antipodean central banks are increasingly behind the curve in dealing with the accelerating deterioration in their economies. Just as the dollar rebound is hardly a reflection of any improvement in U.S. fundamentals, it is no reflection of increased hawkishness by the Federal Reserve, which in fact has modestly elevated its downside assessment for the U.S. economy earlier this week. The view from the market is that the European Central Bank’s (ECB) pendulum of economic concerns will swing closer to economic growth and away from inflation as energy prices are further dragged by the global economic slowdown.
The chart below shows EUR/USD vulnerable to extending losses to $1.50 for the first time since late February, but apart from the psychological importance of $1.50, the major support stands at $1.4920. The USD dollar index (against six currencies) leaps off the 75.00 figure and will likely extend near a major resistance at 78 for the first time since December.
The dollar rally has been most aggressive against the British pound as the currency has been pummeled across the board on persistently negative data, which is likely to render the Bank of England (BoE) as the first G7 central bank to resume its easing campaign. Tumbling to a 17-month low of $1.9218, GBP/USD is expected to reach $1.90 before month end and $1.80 before year end. The currency has not disappointed our beginning of year prediction that it will become the worst performer of the G10 in 2008.
The Canadian dollar tumbles to 12-month lows against the USD, deepening its erosion this morning after the biggest job loss in 17 years. July employment fell 55,000 versus expectations of a 5,000 increase. The loonie has already been the worst performing G10 currency in the first half of 2008 after a stellar 2007. The combination of falling oil prices, aggressive Bank of Canada (BoC) easing and talking down of the currency by the BoC and finance ministry has been instrumental in rendering the loonie as the worst commodity currency. USD/CAD is seen accumulating fresh gains towards 1.0810, as the BoC may be expected to reduce rates by 25 basis points (bps) to 2.75% this month. Unlike the aussie, the loonie is especially dragged by its reliance on negative demand outlook from the United States.
The yen is largely sold off against the dollar but not so much against the euro, pound, aussie and loonie, all of which are near their lows against the Japanese currency. USD/JPY seen capped at 110.45. We continue to alert on impending turnaround in USD/JPY due to the divergence with non-USD yen crosses.
Ashraf Laidi
Chief FX Strategist
CMC Markets US
a.laidi@cmcmarkets.com
www.cmcmarkets.com
