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At 6:00:00 AM E-12 May Preliminary Trade Balance (exp 6.0 bln euro, prev 3.1 bln euro) E-12 April Revised Trade Balance (exp n/f, prev 12.1 bln euro) At 6:30:00 AM E-12 Italy July Cities CPI m/m (exp 0.1%, prev 0.1%) E-12 Italy July Cities CPI y/y (exp 2.0%, prev 2.2%)
The dollar extended Friday's gains against the euro and pound sterling, while also rebounding above 116 yen following the Nikkei's brief drop below the key 10k mark in early Tokyo trade. EUR/USD fell to a session low of 1.0070, putting it down nearly 1.5 cents from Thursday's failed attempt to break 1.02. Oddly, dollar strength came on the back of Friday's unexpected jump in the trade deficit to $37.64 billion in May, more than the $35.5 billion that had been anticipated.
Fundamentally, as foreigners flee US markets dwindling capital inflows cannot finance the growing trade deficit and the dollar will have to decline until a proper exchange rate is reached to bring the two into equilibrium. But speculators, being forward looking by definition have already heavily sold the dollar based on this assumption, meaning that much of the dollar's risk has been accounted for. Thereby showing the non-reaction to Friday's figures.
Interestingly, the largest rise in imports came from the euro area, which represents only about 15% of U.S. trade. Therefore, today's May trade figures for the Eurozone could surprise to the upside. But as the J-curve theory points out, in the beginning the stronger euro only boosts the dollar value of imports until the weakening dollar finally causes a shift in demand and brings down imports as consumers switch to cheaper domestic goods.
Meanwhile, imports from Japan fell nearly 15% in May and could have declined further in June, as Japan has been unable to keep the yen weak, thereby ensuring a strong export sector. Moreover, weakness in US stock markets has caused concern about consumer spending on Japanese goods which in turn pushed the Nikkei's briefly below the key 10k mark for the first time since February lows.
Nikkei weakness poses a dilemma for Japanese officials as they will now have to try to manage a rebound in stock prices and decline in the yen to prevent many large banks from becoming technically insolvent. While they successfully brought the market higher last March, the yen followed higher and has continued to rise even as the Nikkei fell.
USD/JPY continues to look weak after falling on Friday from 117.27 to a low of 115.55. Friday's high failed to overcome key technical resistance at 117.40, which marks the 38% retracement of this July's decline from 120.60 to 115.45. Subsequently, today's high stopped short of breaking through 116.20, the 38% retracment of the 117.27 to 115.55 decline, which means the outlook remains technically bearish. A break below 115.80 support is seen calling upon 115.55 and the previous 15-month low of 115.45. Failure here could lead to a further selloff targeting 114.34, the February 2001 low ahead of 114.10, the 62% retracement of the 101.25 to 135.15 rally.
However, intervention fears continue to dog the market and it will be key for the dollar's near term direction to see how Japan would react to a fall below 115.45. Strong intervention could give renewed vitality to the pair. Reistance is seen at 116.60 followed by 117.30.
EUR/USD support is seen at today's low of 1.0070 followed by 1.0050 and 1.0030. A break below support at 1.0025/30 is seen targeting 1.00 ahead of 99.65, which was both a previous high and now the 50% Fibonacci retracement of the rally from 97.13 to 1.0201. A move below parity would be likely trigger stop loss selling of the pair as it would be a psychological and technical blow to the single currency.