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USD still on the defensive

Tue, Jan 29 2008, 07:34 GMT
by John Hardy

Saxo Bank

USDCAD nearing crucial support level as commodity currencies continue to test stronger.

MAJOR HEADLINES – PREVIOUS SESSION

Overnight developments:

• Japan Dec. Jobless remained at 3.8% vs. a rise to 3.9% expected

• Japan Dec. Job to Appliant Ratio fell to 0.98

• Japan Dec. Retail Trade rose 0.2% YoY, but Dec. MoM Retail Trade fell -0.8%

• Australia Dec. NAB Business Confidence fell to 5 from 6 in Nov.

THEMES TO WATCH – UPCOMING SESSION

Key event risks today (all times GMT):

• France Dec. Housing Starts (0745)

• Sweden Dec. Retail Sales (0830)

• UK CBI Jan. Reported Sales (1100)

• US Dec. Durable Goods Orders (1330)

• US Nov. S&P/CaseShiller Home Prices (1400)

• US Jan. Consumer Confidence (1500)

• New Zealand Dec. Building Permits (2145)

• Japan Dec. Industrial Production (2350)

Market Comments

Equities remained in a buoyant mood yesterday and Asia followed through overnight, but the carry trade reaction in Forex was not consistent. Perhaps the slightly strongish (relative to expectations, at least) data from Japan was enough to prevent the JPY crosses from running away to the upside. The JPY crosses are pricing in a bit too much optimism relative to the moves elsewhere, especially if we use the fixed income market as a gauge for where we ought to stand. The 159 to 160.00 zone in EURJPY looks critical, for example, for continuing to call a bearish trend in that cross and AUDJPY seems to have lost its trending behaviour completely for the moment and is looking a ranging mess. One of the key boosts to AUD has been the moves in metals markets, where sudden ad hoc developments around the world limiting supplies (floods in some Australian mines and electricity problems shutting down South African mines) are continuing to boost the currency, even aside from the overall equity strength. AUD will likely continue to be the big mover amongst the G5 as we look to the reaction to the Fed decision tomorrow evening. The market in general seems to lack conviction and we look for the post-Fed fallout for a clarification on where things stand. The risk of an ugly, ranging market across most FX pairs is growing here if we don't get decisive action very soon.

An excellent article over at the Telegraph (with the wonderful title "Central Banks are fiddling as Rome burns.") outlines the strong cross-currents within the European central banks on the trajectory of rates. What is clear from this situation is that in a year or less from now, the hawks like Trichet and King will either look like visionary and brave icons of monetary prudence, or they will be lambasted as clueless, myopic dinosaurs. I don't envy them their responsibilities as both sides . And the Japanese situation, with real economic sluggishness and inflation that is finally showing signs of perking up, is a possible way forward for all nations - the "stagflation lite" scenario that has been much discussed as a possible market environment. That would be the central banks' worst nightmare come true.

The New Homes Sales data from the US yesterday was truly horrific, even as we've become accustomed to the lead balloon that is the US housing market. Expected to stabilize after showing a huge drop in November, the New Homes Sales number fell another 5% MoM to a fresh 12+ year low. The market is leaning heavily toward a 50 bp cut tomorrow, and we agree with this view in light of the housing data (and despite the sharp rally in equities). The Fed is doing everything in its power to make sure that mortgage resets this year are less painful for homeowners with adjustable rates.

Charts: USDCAD

We're not huge fans of trading technical breaks ahead of key event risks like tomorrow's Fed announcement, but technicals will be technicals and we have an interesting situation developing here in USDCAD, where a clear line of support has developed just above parity (flatline at 1.0012 and 55-day SMA right around the same level) after the pair already broke through the basic rising trendline. We even have a 0.618 Fibo just below parity to add to the setup here. Stay tuned.

Published on  Tue, Jan 29 2008, 07:57 GMT