Dollar Could Get Double-Teamed by Angelo F. DeJoy
The dollar could very well come under pressure against the yen, if the pair fails to make its way over the 110.00, if a third attempt since May 11 fails. After 3 tries the market will likely look to test the downside, which could be the 104.00 level seen on June 23. Despite concerns over Japan's economic recovery, the yen could quickly gain favor with the market. The Bank of Japan on Friday raised the overnight call rate to 0.25% ending its 17 month old zero interest rate policy, amid a more optimistic view on corporate profits, wages, consumption, and ultimately price deflation. Although the market responded somewhat unfavorably to the tightening in a delayed reaction yesterday, the pair has failed to make aggressive moves higher. In fact, much of the move was based on technical trading, where stops were blown at 108.90 pushing the pair to a Monday high of 109.60 in thin summer trade. Prior to this move, on Thursday last week, the yen had been sold on profit taking, where earlier in the week it had been bolstered amid expectations of a narrowing interest rate differential between the US and Japan, and rising Nikkei shares. Nervousness over the affect of the BoJ's rate hike on the Japan economy and Nikkei shares helped induced the profit taking and the maintenance of the bearish tone for the yen.
But the BoJ's ending of its ultra easy monetary policy also signaled that the Sogo bankruptcy had little affect on Japan's economic recovery. And with the Sogo situation in the past, foreign investors have once again warmed up to over sold Japan financial sector shares, which have turned foreign investors into net buyers of Nikkei shares. Last week was the first time foreigners purchased more than they sold since mid April. The Nikkei has also been bolstered by the US economic data, which suggests a soft landing is in the making. Thus far, the Nikkei continues to climb higher, reaching a 5-week high in Tuesday Tokyo afternoon trade to 16286.56. And with tightening interest rate differential between the US and Japan, the yen is likely to gain additional favor against the dollar, as the rate hike becomes yesterday's news.
Meanwhile, the dollar has its work cut out for it against the euro. The greenback has failed to push the European unit substantially below $0.9000, after several attempts this month had amounted to EUR/USD closing below the figure only once, on Wednesday last week. Since recovering, steadying at $0.9065 in late Tokyo trade today, the technical players are more reluctant to push it lower. From a fundamental perspective, the euro may have a bit of an advantage as well. Overall euro bullishness is starting to build steam after last week's hawkish ECB August Economic Bulletin, which suggested inflationary pressures might be rising faster that the Bank had anticipated and that euro weakness was at the heart of the problem. This has many players holding the view that the ECB could tighten by as much as 50 bps on August 31. The euro gained some additional support yesterday after German Finance Minister said the euro had the potential to rise and that he expected the unit to strengthen as European economic growth gathers steam. In fact, analysts are suggesting the Germany's growth could touch 4.0% this year-far outperforming previous estimates of 2.9%-as German restructuring, tax reforms, and new economy benefits take hold.
With that, the likely pressure from both the euro and the yen will only pressure the US unit further. Although US shares have shown signs of life of the past few session, they have only lent support to the dollar, not driven it higher. And who's to say what will happen when profit taking ensues in US shares?
-Aug 15
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Euro Recovery to Start Via Yen By Ashraf Laidi
The latest fundamental picture once again suggests that EUR/JPY has more fuel to lift the single currency back above the 100 yen level and ultimately to 92 cents. The signs of a looming ECB rate hike are stampeding via the inflationary implications of a tumbling currency, whose only rationalization is that of falling confidence.
In its latest monthly report, the central bank sharpened its ant-inflation tone more than ever. This time, though, it is the currency pass-through rather than higher energy prices that is the main culprit. Eurozone inflation hit 2.4% in the year to June, breaching the Bank's reference rate of 2.0%. If the today's strengthening in the euro proves to be a dead-cat bounce strictly on the back of yen weakness, then markets will have reason to expect a rate as early as August 31st and by as much as 50 bps. At this point of the ECB's maturity, markets will rightly interpret a rate hike as a counter to the inflationary threat of the falling euro, rather than the falling euro per se. Today's latest data from the Eurozone reinforce expectations of a near term rate hike. Stronger than expected figures from Germany (June retail sales fell 0.3% y/y vs expectations of -2.5%), Spain (Q2 unemployment fell to 13.9% from 15.0%) and Portugal (July inflation up 3.2% from 2.9%) are all valid.
The euro's eventual recovery, however, is unlikely to reflect itself immediately against the dollar. Continuous tendency of the US economy to surprise on the upside (GDP and productivity) suggests that the waning growth differential story is unlikely to hit the US dollar, despite the expected outcome from this month's FOMC meeting. A 25 bp rate hike remains very much a possibility after the elections. Any rebound in EUR/$ is therefore likely to occur on the back of yen weakness (EUR/JPY gains) stemming from expected lack of immediate positive developments from Japan, and accumulated inflation as well rate tightening expectations from the Eurozone.
Although the aforementioned economic reasoning could well argue for extended gains in $/JPY, the 110 technical barrier in $/JPY makes yen sales a more attractive deal at the 99 level in EUR/JPY . A more convincing climb is therefore seen in EUR/JPY, which could spill over to positive momentum past 90.40 yen and onto the key 100 yen level. Subsequent targets at 100.30-35 should lend EUR/$ substantial fuel towards 92.00 and 92.70.
-Aug 14 |
