Sterling may stage a counter-rally today following yesterday’s big move down as the recent dollar rally runs out of steam. Assuming that the 1.8510 support is not broken, then long sterling positions may be a better strategy for a rebound back to the previous support now resistance line of 1.8590, or even to 1.8650 area. More support may emerge if the market pays attention to comments by BOE’s Mervin King, who suggested the possibility of a rate hike in November, at a time when the Fed is comfortable with the current Fed funds rate. Stops suggested on break of 1.8485 to protect against a decline to the next support level of 1.8385.
BOE’s Mervin King suggested that the September CPI fall may not persist for long, but that the CPI is unlikely to exceed 3%. Before the ONS revision it was assumed the CPI would rise above 3% forcing King to write a letter to the Treasury. However, the rest of King’s speech was hawkish indicating a November rate hike. He referred to an unreleased BOE study suggesting that manufacturing firms intend to raise prices. Total money spending and the supply potential of the economy are the key determinants of medium-term inflation — not oil prices according to King. He noted that broad money supply growth is now higher than at any point since 1990.
Fed’s Fisher downplayed housing market softness in a Q&A session following a speech in London, saying that the housing correction could be ‘one of the most ‘over-anticipated in history’. Fisher stated that the Fed was ‘comfortable’ with current monetary policy but would act if need be to quell inflation.
EUR/USD has remained on the back foot despite the release of strong European data. The pair fell under pressure below 1.2540, finding a bottom at 1.2520 after ECB’s Mersch expressed concerns over medium-term price stability, and deemed policy rates of 3.25% “closer but not inside” the band of neutral rates.
Mersch said that concern would compound should 2008 inflation projections rise above 2%.
ECB President Trichet also saw ample liquidity and ‘stronger than expected wage developments’ as in need of ‘careful monitoring’, lest they give rise to inflation. The signal is clearly of further ECB rate hikes to come, and with the Fed most likely finished hiking rates for the cycle, we should see potential for a medium term EUR/USD rebound. Near-term, however, over-extended spec EUR longs evident on the IMM are probably still weighing the EUR down, amid what analysts at BNP Paribas see as excessive optimism over US growth prospects.
Low yielding currencies continue trading on the back foot and will continue to do so as long as markets remain in a risk seeking mode, BNP Paribas analysts add in their daily report. There are warning signals challenging the soft landing interpretation of the US economic performance, like the disappointing earnings report from the US aluminium producer Alcoa, citing ‘seasonal weakness’ in demand. US short-term bond yields continued to rise putting the yield curve even further into inversion. The inverted US yield curve will keep Asian currencies under pressure.
Today’s release of FED minutes, tomorrow’s Beige Book and potentially strong September retail sales, due out on Friday, are unlikely to change the trend of a higher USD.
Investors are paid to hold the US unit and the recent out performance of the US equity market points in the same direction. Moreover, the weekly ABC consumer climate indicator jumped from -13 to -8 now showing its highest reading since March. The Michigan consumer climate indicator for October will be released on Friday. The ABC money Magazine index indicates that the risk is for a higher reading.
New Zealand’s Cullen reported an operating surplus of NZD 11.47bln in the year ended June 30, 35.2% more than its May budget, lending further support to the NZD. Cullen’s warning that the 9.7% current account deficit will sooner or later cast NZ’s sovereign rating into doubt did not affect the NZD. As long as markets remain in a risk seeing mode yield will be the most convincing reason to hold a currency. The NZD is poised for further gains not only against the USD, but also on cross rates, including the AUD. Japanese names were reported buying the NZD.
Meanwhile, wheat prices have rallied to the highest level since 1996. The biggest wheat producers are the US, Argentina, Ukraine and Australia.
