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At 10:00:00 AM US Dec Chi Fed Nat Act Ind (exp n/f, prev -1.21)
The dollar edged lower on Monday against the euro and pound to day lows of $0.8638 and $1.4186 respectively. Against the yen, the greenback fared a little better by avoiding further losses as it held above support at 132.80. Dollar weakness was mild considering it came off a strong data week, but its sharp 2 point decline against the yen on Friday put pressure on it across the board. However, more weak data from the Europe kept those majors trading in a tight range as well as markets looked to Wall Street for direction today.
The euro was not helped by German wholesale sales which slid a real 10.2% y/y and 1.6% m/m in December. The data brought EUR/USD down to a day's low of 86.07 as it confirmed the general outlook for the euro area's largest economy is bearish. But the data is volatile and the pair later tested resistance around 86.35/40. A break above this would then have to break 86.80/90 to improve its outlook. If not, it still looks vulnerable to fall back below 86.00 on its way to last week's 6-month low of 85.62. Resistance is viewed at 86.80, and the key 87.40/50 level which marks the 61.8% retracement of the 82.25 to 95.95 move.
European Commission data showing the headline economic sentiment indicator rose to 99.0 in January from a revised 98.9 in December had little effect on the market. The headline reading was mixed as the business sentiment indicator rose to -14 from -17 but the consumer sentiment index fell to -11 from -10, against expectations. Producer prices also fell more than expected to -1.1% in December but this is unlikely to raise expectations for an ECB rate cut this week after Euro area inflation jumped to 2.5% y/y in January from the previous 2.1%, thereby dampening hopes. In addition, the weakness of the euro will also help keep rates steady at 3.75%.
The ECB is likely to cite as evidence of improving economic strength the rise in business sentiment as Friday's release of the Eurozone PMI showed a third straight monthly rise to 46.2 in January from the previous 44.1. Even though the PMI remained in contraction territory for the tenth month, markets were optimistic about the Eurozone's prospects for a turnaround. The decision is on Thursday.
Sterling tested key resistance at 1.4183, which marks the 38.2% retracement of the 1.4418-1.4038 move. However, GBP/USD was unable to maintain above that level after mixed data from the UK's CBI retail expectations balance which roe to +25 in February vs +19 in January. The end of the holiday sales season is likely to have brought down the index from a high of 48 in December as consumer spending tapered off in Q102. Strong resistance is seen at 1.4183 followed by 1.4230 and 1.4270. Support is seen at last week's 6-month lows of 1.4045.
USD/JPY rose to a day's high of 133.47 but was unable to break key resistance around 133.50 after plunging over 2 yen on Friday from a fresh 40-month high of 135.20. That was the dollar's second failed attempt at breaking 135 and the outlook this week for another run at it look slim. A break above 133.50 would call upon 133.80 followed by 134.40. Support is seen at 132.80 and 132.40.
Markets are perplexed about Japanese FX policy lately after Japanese FinMin Shiokawa and chief diplomat Kuroda remarked that that the yen's decline from 120 to a three year low of 135.15 was too rapid. Warnings from the Finance Ministry against an excessive fall in the yen is seen keeping pressure on USD/JPY. But markets were more surprised that the MoF chief said he saw no risk of further yen weakness, thereby hinting to dealers that Japan was comfortable with a range of 130-135. Kuroda also hinted that further weakness could be met by intervention after he said on Friday at the World Economic Forum in New York that Japan was prepared to stem rapid movements in its currency when needed. But Kuroda ended his statement by saying "our foreign exchange policy remains unchanged. Beyond that, I will not comment." That in turn confused the markets given that Kuroda had said last week the yen was merely correcting its excessive strength.
Part of the reason Japan has moved away from a weak yen stance is that weakness in stocks, bonds and the yen continued to fan concerns of a flight of assets overseas. On Friday the Nikkei fell to a 4-month low of 9791, below the DJIA's level for the first time in over 40 years. Today, the index fell another 159 points, or 1.63% to 9631. Bond yields are also at historic highs above 1.51%. That, however, should be tempered by repatriation concerns ahead of the year end book closing in March.
Also, dealers are more cautious about dollar/yen strength ahead of the G-7 meeting this weekend in Toronto.
Also, dealers are more cautious about dollar/yen strength ahead of the G-7 meeting this weekend in Toronto.
Wall Street is expected to remain focused on corporate profits and business outlook issues, as well as any further fallout from Enron. Today's earnings include Priceline.com, and Sprint.
In other news, Argentina announced this weekend that the government would in fact float the currency entirely as early as this week, thus ending the dual FX rate system. However, the government would also inact heavy state regulation to stop it from plunging. However, after last Friday's Supreme Court ruling that bank freezes were illegal, there is a very real possibility of a larger run on banking deposits which could ruin many banks. Moreover, this could spark another fall in the peso, which has already dropped to a rate of 2 to 1 dollar.