by Ashraf Laidi // www.forexnews.com //
A stronger than expected report on US manufacturing helped the dollar gain narrowly vs the major currencies, allowing traders to temporarily push aside concerns on US accounting practices. The late session sell-off in US stocks failed to dampen the dollar's positive tone as Friday's central bank action to cap the yen remained fresh in the minds of traders. It was the first coordinated action since September. The dollar's gains were especially highlighted by its ability to regain the 120 yen level in intraday trading and ability to keep the euro below the 90 cents figure.
While the dollar did end the session below 120, markets do see a fresh attempt above the figure for a possible assault of the 120.25-30, which is near the 38% retracemement of the 121.98 high to Friday's 118.36 low. Subsequent resistance found at 120.65-70. Support starts at 119.70 backed by 119.35-40. Intervention concerns will likely resurface in the event that we near the 119.00 mark. It remains to be seen the degree of effectiveness of Friday's coordinated intervention in keeping yen bulls on the sidelines, before they strike again. The BoJ could well step up another round of yen selling intervention to capitalize on thinned trading volumes in a holiday-shortened week such as the current one. While US markets will shut on Thursday in observance of 4 July Holiday, FX markets will have the ECB interest rate decision at 7:45 AM EDT followed by the post meeting press conference at 8:30 AM.
The single currency did prove to be the weakest link in today's activity falling to fresh session lows against the dollar and the yen at a 98.57 cents and 118.41 yen. News that the French govt is considering renationalizing France Telecom has weighed on the euro on the grounds that France's budget deficit may erode further, thereby complicating the nation's quest to meeting the highly scrutinized stability pact requiring a balanced budget by 2004.
German Chancellor Schroeder said today there were no plans for the government to raise its 0.75% GDP growth forecast for 2002, despite optimistic forecasts by German private sector institutes. The IMF from its part raised its forecasts for the Eurozone's largest economy to 1.0% from 0.9%, but strangely enough the government itself is taking a more conservative approach. Schroeder will be running for reelection this fall, facing an increasingly strong opposition from the Conservatives. Rising unemployment has also become one of the key issues complicating Schroeder's campaign.
EUR/USD proved to be largely capped at the 99-cent figure, making the 98.70s increasingly look like the next support level. Subsequent support seen near the 98.40-50 territory, which rests above the trend line support extending from the 94.10 low (June 17) thru the 96.70 low (June 25). A break below this point will likely call up Friday's post intervention low of 98.33. Further downside faces interim support at 98 followed by 97.60 38% retracement of the rise from the 94.10 to the 99.87 high. Upside seen initially limited at 98.90-00 cents with further buying seen capped at 99.30. A break above 99.70 will likely see strong selling at parity. Medium-term resistance at 1.020 50% retracement of the decline from the 1.1845 all time high to the 82.27 cent all-time low.
Weighed by an unexpected decline in June PMI, Sterling remained unable to regain the $1.5320 mark, which limits the retracement off Friday's post-intervention lows to no more than 2/3rds. A break above 1.5320 will likely face downward pressure near today's 1.5348 high. Support seen at 1.5280, 1.5235-40.
USDCHF failed to extend gains past the 1.49, before dipping to 1.4830s. Support starts 1.4790-00 backed by 1.4750-60. Resistance starts at 1.49 followed by 1.4935-40.
The June report on manufacturing rose to 56.2 from 55.7, overshooting expectations of a 55.8 reading. Markets shrugged the 2.5 point rise in the Prices Paid Index and applauded the rise in export orders as an clear result of the falling dollar.
US stocks showed higher trading volumes than is usually the case on 4th of July week, but that was no comfort for the major averages all of which ended in negative territory. NASDAQ closed down 59 pts or 4% at 1403, its worst level in 4 years amid continued erosion of trust in corporate America. Dow fell 133 pts or 1.4% at 9109 while S&P500 lost 2% at 968. News of an explosion in Afghanistan injuring more than 120 people helped in flashing the red signal on the geopolitical front.
No major US data are due tomorrow, but the barrage of releases will resume on Wednesday showing May factory orders and June ISM non manufacturing , and finally June non-farm payrolls and unemployment on Friday.