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There was little news and the dollar sentiment was too shaky given the renewed financial turmoil. This has been ignited by concerns credit problems at US banks are bigger than earlier expected and this was already confirmed last weekend by additional write-downs at Citigroup and the stepping down of its CEO Prince.
Yesterday afternoon’s release of the US ISM non-manufacturing, which improved to 55.8 from 54.8, was of no help to alter sentiment.
Indeed, this morning, the USD came under renewed pressure in Asian trading and the pair is again at the 1.45 area.
There appears to still be a predominant sell-USD-into-strength atmosphere, so we wouldn’t row against this tide.
We are obviously disappointed in the dollar as it couldn’t fight back last week despite the Fed not pre-announcing a December rate hike and the solid payrolls in the US.
For now the financial turmoil makes the dollar softer, but if EMU banks would have to confess likewise problems, the euro ascent could suddenly find itself capped, so caution is needed at this stage. For now though, this is still a sell-USD-into-strength sentiment we trade in.
Today, the US agenda is again practically empty, so some attention will go to the EMU PMI services report and the retail sales, but neither is usually market moving to be honest.
Yesterday, USD/JPY gave the impression of continuing to sink lower, as the pair at first went from the 114.60 zone to the 114 area, but then a rebound occurred without any fresh news and the pair recaptured the 114.50 area. This morning even the 114.60 zone was reached, as Asian equities rebounded too.
We believe that investors are likely disappointed in the yen rebound seen over the past 48 hours. The risk aversion story has once more made first page headlines all over the globe, so this should have been a very yen positive moment, except in reality this was hardly visible. We also bet on yen gains yesterday, but were left in the cold surprisingly, despite equity markets etching out some losses.
Still, we feel the USD/JPY has unsuccessfully tested the 115.30 zone resistance last week, and as it failed to sustain above this indicates that there is some downward scope in a buy-yen–on-dip scenario near term. We would install stop-loss on a move above the recent high at 115.93.
Regarding the carry trade theme, there is a lot of attention short-term for the Australian dollar. The RBA meets and will likely decide coming night to hike rates to 6.75%. What’s more, due to the extraordinary strong eco data and jump in core inflation recently, there is a big chance of some more hawkish talks as well. This should underpin the Aussie dollar…
The sterling received quite some bad news yesterday, with dramatic slowing of activity visible in the October services PMI (fall from 56.7 to 53.1!) and the disappointing industrial production data. Overnight, the UK BRC retail sales growth slowed sharply to juts 1.0% Y/Y.
Last week we pleaded for some downward correction in EUR/GBP, down from the 0.70 zone. This has materialized with the pair falling back to the 0.6940 area. Yesterday the pair ticked up, under the influence of the bad news, to the 0.6960 zone. The pair is still in a broad sideways mode between the 0.7028 and the 0.6894 zone.
The resurging financial turmoil in the US may trigger some cautiousness in the UK, as in the recent past it spread to the UK easily (recall the Northern Rock debacle), so the sterling could be fragile to bad news on this front too. For now, the sterling has shown some more resilience than before to this US story.