Range is still the name of the game
Charis Charilaou
Chief Dealer
Major currency crosses are expected to stay in range ahead of next week’s central bank decisions in the Eurozone, the US and the UK, but downside USD risks should prevail towards the end of week as US releases GDP on Thursday and Non-farm payrolls on Friday.
Falling oil prices ($125) and weak data out of the Eurozone were the central theme last week. A weaker than expected German IFO and poor EZ manufacturing data sent the EUR/USD to a low around 1.5630 on Thursday before bouncing back after weak US housing data again. The rally in the US banking/financial sector also helped the dollar recovery, but that sector slumped again on Thursday and Friday and helped to broadly weigh on the USD. Fed's Plosser also tried to help the USD saying that a Fed interest rate policy reversal should come sooner rather than later. Last but not least, in a move that was widely expected, House and Senate leaders decided a compromise deal on a huge housing package that will allow the government to save Fannie Mae and Freddie Mac and also included tax breaks for homeowners and a 300 BLN USD program to refinance loans for struggling borrowers. However it was not all good news for the USD as, following the fall of Indy Mac 2 weeks ago, Federal regulators shut down First National Bank of Nevada(3.4 billion assets) and First Heritage Bank of Newport Beach on Friday.
Sterling started the week softer with a little help from BOE's Blanchflower dovish comments together with a very poor subscription (<9%) of the HBOS rights issue and weak retail sales later in the week. UK Sunday Times reported that the UK economy is heading into recession and may face a slump on the scale of the early 1990s. After figures on Friday showed that quarterly growth had fallen to 0.2% in the second quarter of this year, a "technical recession" of two or more consecutive quarters of falling GDP is now all but guaranteed. The report predicts that the Bank of England will be forced to cut interest rates to 3.5% next year, from 5% now, but even this will not be enough to bring about an early recovery.
Once again the week saw a new all-time high on EUR/JPY but as the week came to an end with softer equity markets the cross was pressed lower trading as low as 167.50. The USD/JPY traded between 106 and 108 and closed the week near the upper end driven mostly by the surge in US Treasury yields.
LOOKING AHEAD
US is on the spotlight again this week with the release of US GDP (expected +1.8%) on Thursday followed by the main event of the week US non-farm payrolls (expected -70k) on Friday. US Consumer Confidence will be also due on Tuesday while May's Case-Shiller house price index is expected to fall to -16% yr/yr from -15.3%. On Thursday the Chicago PMI should see a fall to 48.5 from 49.6, and Friday's ISM manufacturing survey should also stay weak, falling to 46.6 from 50.2.
In the Eurozone data is out on Thursday and Friday including EZ sentiment index, inflation data, German Retail Sales and EZ Manufacturing PMI. However, first main focus is on the German HICP inflation numbers which are expected higher at 3.6%. . The flash July Eurozone HICP number is released on Thursday and is expected above 4%.
UK data are scheduled for Tuesday with crucial lending and retail data. The July CBI distributive trades survey is expected to fall to -17 from a previous -9, adding to the negative evidence surrounding the state of the UK consumer. The July Gfk consumer confidence is also expected to add on the negative sentiment and is expected to fall to a new low of -40.
STRATEGY
In spite of the sharp 17 % correction in oil prices and the very weak recent Eurozone data, EURUSD is still close to the all-time highs and although in a short-term range of 1.53-1.60, the long-term uptrend remains intact. Fed members such as FOMC voter Plosser have ramped up talk of hiking rates sooner rather than later but many analysts feel that Fed rate hike talk is premature given the fragile state of the US banking sector and the US economy as a whole. The market focus remains on the health of the US banking/financial sector which is still far from healthy despite the unprecedented measures taken by the FED and the US government. Slashing interest rates, liquidity measures, tax rebates and the huge deal on Fannie and Freddie have all but turned the sentiment around. On the other hand, Eurozone well above target inflation this year is challenging the ECB’s policy setters and it looks as though the below 2% target will be overshot for all of 2009 as well. Overall it still looks that the bias for weaker stocks, lower yields and a weaker USD are still in place, and with the ECB still far from turning on rate cuts, the EURUSD upside door looks wide open. This week busy US and EZ data might be crucial in shaping Fed and ECB expectations. We look for a range of 1.56-1.60 to hold for this week although we still remain on a strategy of buying the dips.
JPY is also on a weakening mode as Japan’s sluggish exports are causing a big drag on the economy. EURJPY looks set for a break above the all time high of 170 and we wouldn’t be surprised to see it test 175 in the weeks ahead.
Disclaimer
This research report or summary has been prepared by TFI PCL from information believed to be reliable. Such information has not been independently verified and no guarantee, representation or warranty, express or implied, is made as to its accuracy, completeness or correctness. This report is provided for information purposes only. Nothing in this report should be considered to constitute investment advice. It is not intended, and should not be considered, as an offer, invitation, solicitation or recommendation to buy or sell any of the financial instruments described herein. TFI PCL accepts no liability whatsoever for any direct or consequential loss arising from the use of this document or its contents.
