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At 8:30:00 AM US Jan Exports (exo 55.5 bln, prev 54.9 bln) US Jan Imports (exp 88 bln, prev 86.3 bln) US Jan Trade Balance (exp -27.1 bln, prev -25.3 bln) At 8:40:00 AM US Redbook (% m/m) (exp n/f, prev -1.2%) At 9:00:00 AM US BTM/UBSW sales (weekly change) (exp n/f, prev -0.7%) US BTM/UBSW sales (weekly change) (n/f, prev -0.7%) At 2:15:00 PM US FOMC Meeting Decision (exp 1.75%, prev 1.75%)
With spring approaching, the yen bears came back from a short hibernation and added to yesterday's momentum driving USD/JPY through resistance at 131.65 and tripping stops on its way to a near 2-week high of 131.83. The dollar edged closer to the previous well-worn trading range of 131.80-135. But strong option resistance at 131.80 sent the dollar back below 131.65, which marks the 61.8% retracement of the move from 134.95 to 126.32. The break of 131.65 was a positive development for the dollar, but for the current rally to maintain momentum it is imperative for USD/JPY to break back above 131.80 to avoid a possible selloff from its recent highs. Key resistance seen at 131.65 followed by 131.80.
Dealers say that foreign demand for Japanese shares is fading and this should keep USD/JPY above support at 129.65. A break below 129.65 would put the bull on hold, but only a breach of 127.75 would signal a resumption of the bear. However, this is not likely given the end of fund repatriation by Japanese investors this month, which should further encourage dollar bulls. Moreover, with reformers losing ground, Japan will put off the key structural restructuring needed and this will translate into a weaker yen. The LDP has again defeated reformists, making the prospects for serious change unlikely. Political reformer Kato's resignation dealt a blow to reform efforts since he was one of the major supporters of change in the LDP.
The euro stuck to a tight range Tuesday, as sentiment remained cautious ahead of today's monetary policy meeting in the US. EUR/USD traded in a tight 88.10-88.35 range as the greenback's upside was seen limited ahead of the Federal Reserve's policy meeting. The market expects the Fed to change its policy stance from the current view, which sees the economy at risk of further weakness, to neutral. Expectations of such a shift, as well as stronger US economic data late last week have helped the dollar. But dealers are likely to focus on Greenspan's wording today as they try to gauge his sentiment on the US recovery. A move to the neutral bias is widely expected so the dollar will be held back by the prospect of future interest rate hikes. Moreover, if the Fed fails to move to the expected neutral bias on Tuesday, financial markets will be disappointed by the implicit suggestion that it thinks the economy is still too fragile. No rate change is expected. The FOMC decision is expected at 2:15 PM NY time.
Despite rangebound trading against the euro and Swiss franc, the dollar failed to contain sterling below GBP/USD trendline resistance at 1.4280. Cable rose to a near 2-week high of 1.4301, just above key trendline resistance at 1.4280. The last time it tested trendline resistance sterling was at 1.4306 but was rejected and subsequently fell nearly two cents to trendline support at 1.4090, where it then rebounded. Therefore, key resistance seen at 1.4306 followed by congestion in the 1.4330 range. Failure to overcome these levels should force cable back below 1.4280 trendline resistance.
The mixed reaction to the dollar is the facet of growing sentiment that the US economy is not out of the woods yet. Former World Bank chief economist Stilglitz today said the US is likely to remain well below its 3.5% growth potential. Therefore, dollar gains are also likely to be contained because despite the recent upbeat data, the dollar has been held back by apprehension on Wall Street and Greenspan's fear that a low level of business investment and high consumer debt will ensure that any economic upturn proves very gradual. That also means that the possibility of an immediate rate hike in the US is remote because the Fed will want to see a real improvement in business investment, not just a rebuilding of inventories which could peter out with weak final demand.
Today's data from the US is expected to show weakness in store sales data for March but an improvement in the housing market to 60 in March from 58 in February. The trade deficit is expected to have deteriorated in January, due to a faster increase in imports than exports.
EUR/USD also broke earlier highs around 88.30 after finding support at 88.10 and rose to a day's high of 88.47. Dealers expect there to be a lot more room for action in USD/JPY than EUR/USD over the coming weeks because the dollar will struggle to make gains against the euro as the market has shifted from worrying about the ECB not cutting rates to worrying how fast the Fed will raise rates. Therefore a fast recovery will be tempered by expectations of rate hikes, which could weigh on the dollar. Meanwhile, the Eurozone will benefit from a US-led recovery, aiding the euro by association. As long as EUR/USD support at 87.80 holds, there is still a chance for another try at trendline resistance of 88.80.
There is an ECB decision on Thursday, but no move is expected. On Thursday the Swiss National Bank is also expected to keep rates unchanged, thereby limiting the downside pressure to the franc. Recent commentaries by SNB board members indicate that the high level of the CHF is a concern, but by itself not sufficient to affect the FX rate. Yet the market would regard a rate cut as an attempt by the bank to weaken the franc through easing liquidity. Any correction seen capped at 1.6747, the 38.2% retracement of the 1.7115-1.6517 move. Support seen at 1.6480.
USD/CHF fell to a day's low of 1.6580, but remained above last week's lows around 1.6480 after ending a sharp five-franc retreat that week. The franc has benefited across the board as safe-haven flows sparked by fears of US military action in Iraq added to recent gains. But, CHF softened in early trading on Monday after SNP president Roth said the bank could cut interest rates further although all options were open. Roth said the SNB remained concerned about the level of the franc but would not target a certain level.