overnight currency movements

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    May 19, 4:00 PM: EUR/$..1.1658 $/JPY..117.29 GBP/$..1.6330 $/CHF..1.2968

    BoJ Clings to Strong Dollar Policy Discarded by Snow by Leeanne Su

    The dollar regained mild composure during the New York session following an overnight sell-off triggered by fresh signals that the Bush administration has discarded the strong dollar policy. Speaking after the G7 meeting this weekend, Snow indicated that the dollar's strength should derive from its virtues as a good medium of exchange and ability to maintain public confidence rather than its market exchange rate. Moreover, Snow shrugged off the greenback's recent slide as a "fairly modest realignment of currencies. Traders promptly dumped the dollar on the Treasury Secretary's evident lack of concern over the currency's depreciation.

    But the dollar's decline was halted by suspected intervention by the Bank of Japan ahead of the opening of New York markets. USD/JPY surged sharply above the 116.50 after hitting a two-year low at 115.10, most likely due to a barrage of buy orders from the BoJ.

    On the economic front, US leading indicators inched up 0.1% in April after a 0.2% drop in March. The improvement in consumer expectations, rising stock prices, and growing money supply led the increase in the overall index, but mounting jobless claims and weakness in business activity continued to drag on the recovery.


    In contrast to the US Treasury's downgrade of its strong dollar policy, EU officials continued to speak in favor of a robust euro. EU Monetary Affairs Commissioner Pedro Solbes repeated that a strong and stable euro benefits the Eurozone economy even though only a week earlier, he had expressed special concern over the euro's steep rise. European Central Bank President Wim Duisenberg and Bundesbank President Ernst Welteke also reaffirmed the Bank's support for a strong single currency. Additionally, Welteke also acknowledged that the central bank could have more flexibility in terms of monetary policy if the euro continues to rise and oil prices subside.

    EUR/USD reversed below 1.17 but could still secure its launch rate of 1.1750 in the next few sessions if dollar bears continue to dominante. Additional upsides could target 1.1785 initially, followed by 1.1845 and 1.1885. Meanwhile, a move lower is expected to pause at the previous resistance point at 1.1620. An extended correction should see firmer floors at 1.1535, 1.15, and 1.1460.


    USD/CHF dipped to its trend line support at 1.2895 during London trade but managed to recoup half of its losses. The next downside target is located at 1.2850, bolstered by the October 1998 low at 1.2747. On the upside, a move above the upper bound of its descending channel at 1.3260 allows for a deeper recovery to 1.3360 and 1.34.


    In another indication that the British housing market is facing a slowdown, the RICS housing price tumbled to an eight-year low in April. The index plunged to -31, down from -23 in March. But the RICS noted that the downturn is showing signs of stabilization, calming fears that the housing market could see a collapse.

    Key UK data due tomorrow will be the April inflation report. The retail price index excluding mortgage interest payments, used by the Bank of England as its primary inflation measure, is projected to inch up to 3.1% from 3.0%, further away from the Bank's 2.5% target rate. In last week's quarterly inflation report, the central bank admitted inflation is likely to edge higher in the near term before subsiding towards its target by early 2004. The sterling's sharp fall in the first quarter also raised concerns that a depreciating currency could drive inflation higher. Nonetheless, some economists still believe the BoE could cut rates in upcoming months if the economic recovery stalls. And in the event that the sterling's recent run-up proves sustainable, the members of the MPC could see more maneuvering room for easing monetary policy.

    Cable strengthened for the fourth consecutive session as improving data and sustained dollar weakness continue to buoy the pair. Resistance starts at 1.6415, with ensuing barriers expected to arise at 1.6470 and 1.65. Advances past 1.6535 opens the path to the January 31st high at 1.6572. In the event of a turnaround, minor support at 1.6230 could help contain losses. A longer decline is likely to find support at 1.6180 and 1.6145 -- the 61.8% retracement level of the fall from 1.6572 to 1.5458.


    USD/CAD extended its downward spiral to a six-year low at 1.3509. A mild recovery in the dollar pulled the pair back to the 1.36 level in the afternoon, but fresh declines could bring 1.3475 and 1.34 into consideration, with key support seen at 1.3340. Subsequent resistance is eyed at 1.3720/30, 1.38, and 1.3835.


    The Monday edition of the Nihon Keizai Shimbun reported that the MoF and BoJ spent nearly 2 trillion yen in keeping the USDJPY exchange rate above the 115-handle in the past week. Additionally, the amount spent in the past week nearly equals the 2.38-trillion yen used to intervene in the first quarter of this year. According to a Cabinet Office survey of exporters, the average threshold dollar/yen rate for profitability is seen at 114.87, which is certainly too close for comfort given the pair's current trading level.

    USD/JPY vaulted back above 117 after suspected intervention from the Bank of Japan sent the pair soaring back above the crucial trend line support at 116.00. Initial resistance is seen at the 200-week moving average at the 117 handle, followed by 117.50 and 118.30. Further gains are expected to face curbs at the 100-day moving average of 118.90 then 119.25. On the downside, an interim base could be offered at 115.50, backed by the intervention threshold at the 115 axis. A break below opens the path for a deeper decline to 114.00, which combines the 50% retracement of the rally from 79.785 ( April 1995 ) to 147.62 ( August 1998 ) and the 61.8% retracement of the rise from 101.24 ( November 1999 ) to 135.15 ( Feb 2002 ) .


    The Aussie clawed to a three-year high versus the dollar at 0.6592. Light resistance at 0.6635 could temper initial upsides, with follow-up barriers seen at 0.6685, the high from January 2000, and 0.67. Meanwhile, a corrective move could see a respite at 0.65. Further downsides are likely to regain traction at 0.6340 and 0.63. Below here, renewed buying interest should surface at 0.6250 and 0.6215.

    Tomorrow Economic Calendar

    Data scheduled for release on Tuesday consist of France first quarter GDP, Eurozone March industrial orders, UK April retail price inflation, UK April harmonized consumer price index, Eurozone March preliminary trade balance, Canada March wholesale trade, US ISM semiannual report.

    The Dow Jones Industrial Average plunged 186 points to close at 8493 while the Nasdaq Composite shed 46 points to end at 1493
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