Forex Comments
The USD lost its way yesterday as new woes in the mortgage industry surfaced and soured the greenback’s rally attempt. This time around, the news centered on the 800-pound gorillas of the US mortgage industry, the so-called government sponsored enterprises (GSE’s) Fannie Mae and Freddie Mac. The fear is that the two companies will fall victim to new accounting rules that will require them to raise huge amounts of additional capital. This news overshadowed what should have been very USD-supportive developments, namely, a chunky drop in the oil price and a surprising and sizeable drop in May German industrial production data. By the end of the day, however, a hefty drop at the short end of the US yield curve sent the yield differentials back in favor of the EUR. Still, the technicals suggest that EURUSD needs to punch through the 1.5750 weekly pivot level and 1.5800 Fibo retracement levels before it looks in danger of fully wiping out the recent sell-off. To the downside, we focus on the 1.5680 overnight low and the 55-day moving average just above 1.5600, which seemed to be the excuse for support yesterday.
Meanwhile, a G-8 meeting is underway, though one that only includes heads of state rather than central bank/finance ministers. Bush reiterated the tired strong USD position of the US. While we can all scoff at the US talking up the USD, the macro regime has recently been dominated by the implications of a weak USD - especially in the pressures of commodity prices on inflation in both the emerging and developed economies - and it is increasingly evident that it is in the entire world’s interest to see the greenback stronger, so there may be a floor in the USD in place in the bigger picture, if not at present levels. Still, we need to see more signs of multilateral verbal intervention at minimum if we are to believe that a real agreement to do something about the situation has been taken. (not just coordination between the Fed and US Treasury, who have taken the first baby steps).
The highlight of the week may be the Bernanke/Paulson testimony on Thursday as we watch for the Fed’s view of the economy and monetary policy and for any further signs of strong USD rhetoric. We may see a test soon on how much the market continues to react to the same old interest rate differential story as opposed to other potential developments down the road (capital flows and risk aversion on the implication of the global growth slowdown, for example: there’s more to the world than yields!).
At the risk of beating a dead horse, we are absolutely astounded at the resilience of the JPY crosses to bad news and wonder how long this jaw-dropping performance can continue. AUDJPY showed some signs of weakness, but the classic risk appetite crosses like EURCHF are still lollygagging in no-man’s land. What gives? We’re supposed to place the blame at the foot of commodities, it seems, but something desperately strange is going on here - EURJPY should be about a thousand pips lower. These JPY crosses should be getting absolutely hammered in this environment…we can only drum our fingers in frustration for now, but can’t help but wonder if we should be putting on some JPY calls. AUDJPY and GBPJPY downside anyone? We keep seeing uglier and uglier data from Australia and the UK….
Chart: EURJPY
EURJPY rose to a new record recently, but failed to find increasing momentum there. From a fundamental perspective, both in terms of interest rate differentials and risk aversion, this cross should be headed lower, but needs to take out another couple of support levels before it shows more decisive signs of negative momentum. The rising trendline seems to be the most significant support and could come into play soon as a trigger.