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Daily Fx Strategy

Dollar Faces Dual Threat from Trichet, Payrolls

Mon, Jun 30 2008, 13:11 GMT
by Ashraf Laidi

CMC Markets

The latest record in Eurozone inflation at 4.0% annually in June is the latest catalyst to the broadening euro strength and continued dollar weakness. In a week when the European Central Bank is expected to raise rates at the same day that US jobs figures are set to show prolonged weakness, dollar weakness remains the order of the day. This is cogently highlighted in the new record high of $143.54 per barrel in crude oil and the latest 4-week high of $935.40 per ounce gold.

Considering the ECB decision, US non-farm payrolls, US services and manufacturing ISM surveys, we expect EURUSD to regain $1.5955, but the $1.60 figure may serve as the line in the sand for USD weakness, at which point we anticipate renewed jawboning from US and European officials. But jawboning does not mean actual USD-supporting intervention as the fundamentals are exceedingly stacked against the currency, which makes the fruits of an intervention short-lived.

At 9.45 am, Chicago June PMI seen at 48.4 from 49.1, with the subcomponents in new orders and jobs.

EUR Rises on ECB, Oil, US Reports

Euro surged to afresh 3-week high of 1.5836 before retreating on overall consolidation prior to the US open. Aside from the potential of disappointing US data, the ECB press conference may sound off a more hawkish tone than anticipated. It may be argued that in order to avoid an excessive euro run-up in the aftermath of Thursday's rate hike, the ECB would stress on the downside risks to the economy. But the deterioration in European inflation bears reason for persistent hawkishness. Inflation in Germany jumped to 3.3% from 3.0% while that in Spain it surged to as high as 5.1%.

Having breached above $1.58, EURUSD is expected to face interim resistance at $1.5870. The element of US weakness and jawboning is expected to see the currency taper off at 1.5955. Our long term perspective continues to expect a rate cut from the Federal Reserve, which will make the $1.60 a likely target in mid next month. Support seen holding at 1.5740, backed by 1.57.

Yen Regains Risk Appetite Luster

What may have begun to look like a waning in the inverse relationship between the yen and risk appetite is now eroding as the Japanese currency joins the Swiss franc in rallying against the majors on heightened market pessimism. Last week's breach in the Dow to 2-year lows and the S&P500's nearing of the March lows has dragged the indices back into the common definition of a bear market as both are down 20% off their October highs. USDJPY breaks below the 50-day MA fir the first time since April 22. Our medium term forecasts of 100 in August, remains intact. We expect a breach of 104.30, to give way to the next key target at 103.70. Upside remains limited at 105.70.

Aussie Breaks to New Record, RBA Awaited

Aussie breaks above its 24-year high of $0.9650 to hit an all time record high of $0.9667 on rising gold, weak USD and expectations that tonight's RBA interest rate decision (12.30 am EDT) will maintain a hawkish tone towards inflation despite recognizing weakness in most sectors. The RBA is widely expected to hold rates unchanged at 7.25%. Weak consumer confidence, gradually rising unemployment and weak housing figures have not alleviated the central bank's nervousness, Downside could reach to as low as 0.9540 on persistent US equity declines and post-RBA reaction. In fact, note the daily pattern of the Aussie's retreat in afternoon US trade, following fresh session highs prior to the close of London trade. Despite support loominbg as low as 0.9570 and 0.9540, we expect Aussie to retest 0.9640 and 0.9670. Medium term outlook remains for 9.9770 and 0.9830.

GBP Capped at $1.9980

Cable rallies as a result of rising oil and weakening US fundamentals, highlighting the divergence from weak UK fundamentals. Comments from members of the Bank of England's Monetary Policy Committee indicating they considered raising rates earlier this month seem to have shut the door of any BoE easing this year, but our perceived risk of further BoE rate cuts later this year alongside the Fed has more downside room for the pair. Most notable, Governor King remarked the probability of 4.0% inflation while at the same time stated his opposition to putting the economy into recession just to avoid writing letters on inflation.

Key resistance stands at the 200-week MA of $1.9980 and 50-week MA of $1.9930, suggesting that the key pressure point remains at $2.00. We expect GBP to be a major victim of any decline in oil prices resulting from FX jawboning or unexpectedly strong US jobs figures. Note also that the Relative Strength Index is nearing the 67 level, which is the highest level since March 2008. Support starts at 1.9860, backed by 1.9800.

Published on  Mon, Jun 30 2008, 13:14 GMT

Archive

• Pre- EU CPI, US GDP FX Strategy
  Published On Thu, Jul 31 2008, 07:35 GMT
• GSEs' Impact on Foreign Inflows & Risk Appetite
  Published On Mon, Jul 14 2008, 13:35 GMT
• Dollar Gets Bernanke Lifeline
  Published On Tue, Jul 8 2008, 13:25 GMT
• Dollar Faces Dual Threat from Trichet, Payrolls
  Published On Mon, Jun 30 2008, 13:11 GMT
• Dissecting H1 FX & Gold Performance
  Published On Fri, Jun 27 2008, 15:14 GMT

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