Foreign Exchange Research - USD Unable to Follow up, GBP Down Across the Board
We focus today on the
unfolding divergence between the rally in US equity markets of the past 3 weeks
and the macroeconomic data in the US which have swayed from neutral to deteriorating.
Fridayâ€™s release of US payrolls triggered a rally in equities and the dollar
partly on a decline in the unemployment rate and a smaller than expected
decrease of payrolls. But markets also rallied on the Fedâ€™s announcement to
expand its TAF lending program and increase its swap lines with the European
Central Bank and Swiss National Bank less than an hour before the release of
the labor report.
Therefore, we reiterate our calls for cautiousness that the improved state of
equity markets is a result of the Fedâ€™s persistent liquidity operations rather
than an improved economic outlook. After all, payrolls have shown losses for
the past four straight months and the unemployment rate remains in the 5.0%
handle. The sectoral deterioration has not abated, with construction,
manufacturing and retail all continuing to shed jobs at the same pace as in Jan
and Feb. The improvement largely emerged from an upswing in temporary hiring.
The implications for consumer demand merit close attention, which is why the
Fed has urged to remain on data watch.
We disagree with the notion that the Fedâ€™s removal of the negative outlook
phrase from its FOMC statement was due to their knowledge of a better than
expected labor report. Instead, the omission was due to relative stability in
financial markets as well as the Fedâ€™s increased preoccupation with
accelerating inflation. Again, the Fed remains on data watch, but its
preference to pause from cutting rates in June is due to inflation and not
improved economic outlook. One should also ask what will be the elements
holding equities together when earnings season is over?
Our focus on equities is related to the existing correlation between risk
appetite and the Japanese yen. But the rest of the activity in currencies
remains clear.Some strengthening in
the dollar has indeed materialized, but key levels have yet to be breachedagainst the yen and the euro, which will be
visited individually below. Similarly, gold has held above the key $840
foundation and is now at $868 per ounce.
Todayâ€™s releaseof the April services
ISMis expected to show decline to
49.5 from 49.6 in March. Employment ISM was at 46.9 in March and in February,
while new orders rose to 52.2 from 50.8.
Euro Firms Above Key Support
The euro has gained a full cent from Fridayâ€™s $1.5362 lows, as the currency
succeeded in stabilizing above the major support of 1.5345-50. ECBâ€™s Trichet
today reiterated the importance to contain rising inflationary pressures amid
speculation of a divergence among the Governing Councilâ€™s view on inflationary
pressures and slowing growth. Only a reading above 50 and a rise in employment
index in the ISM survey will likely drag the euro closer to the 1.5420s, but
support will remain solid at 1.5380. Meanwhile, 1.5480 and 1.5520 will function
as the near-term upside targets.
USDJPY Still Fails at 105.50
Just as the dollar failed to break above the key 1.5350 support against the euro,
it is unable to breach above its 100-day MA against the yen, at 105.50. It
would take convincing rise in the services ISM past the 50 figure as well as an
increase in the employment component to make the 105.50 a reality today.
Failure of doing so may trigger profit taking in US equities, which would be an
extension of the retreat in S&P futures in Monday Asian trade. A successful
breach of 105.50 would require a close above 105.55-60. We expect downside to
emerge near 104.80 and 104.50.
Sterling Remains the Big Loser
Another day passes confirming our bearishness in the British Pound. Despite the
dollarâ€™s pullback against EUR and JPY, the currency is gaining substantial
ground against GBP, which shed nearly half a cent to $1.9660. Lower lows and
lower highs continue to dictate technical course for the pair, with support
standing at 1.9645. Positive ISM to drag cable towards 1.9610. Upside to face
resistance at 1.9720.
Chief FX Strategist
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