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The dollar added to its end of the week rally, climbing to a new 3-week high of 119.30 yen as well as testing resistance at 98.50 against the euro and 1.47 Swiss francs. Other currencies suddenly came under pressure on Friday as a 339 point drop in the Nikkei fueled yen selling and more positive data from the Eurozone failed to support the euro. Specifically, the euro failed to capitalize on encouraging data showing net investment in the region almost doubled to 37.1 billion euros in May from the previous month. This followed Monday's inability to rally on a larger than expected rise in the month's trade surplus, despite a surprise improvement with the US.
The euro's failure to rally on two key pieces of data which show an improvement in real capital flows to the region bodes poorly for the single currency, because it hints that speculators have already priced it in. Moreover, the stabilization of US stock prices may also have also encouraged dealers to exit recent positions in the euro in case of a more substantial rally on Wall Street.
EUR/USD support seen at 98.50. Recall that the initial sell-off on Friday came when the euro failed to overcome 1.0065, the key 62% retracement of the 1.02 to 98.45 decline. There is now a double-bottom formation at 98.50 and a break below here is seen opening up the way for a test of the July 5 low of 97.10, from where the euro rallied to a 2-year high of 1.02 before succumbing to heavy selling pressure. Resistance eyed at today's high of 98.75 followed by 99.10, 99.30 and congestion at 99.50. But only a move back above 99.80, the 62% retracement of the 1.0065 to 98.50 decline is seen improving the near term outlook.
The Nikkei regained some of Friday's losses after the index plunged 339 points to a low of 9591. A falling yen and Friday's rebound on Wall Street helped exporter shares this morning, but the index is still below 10k which dealt a major blow to the yen on Friday as many international dealers exited positions. A move below this major support threatens the solvency of Japanese corporations with large equity portfolios, especially the banking sector. Therefore, falling stock prices exacerbate Japan's long-term banking crisis by lowering the value of banks' substantial equity holdings. Over the weekend Japan's Financial Services Agency felt inclined to calm fears about Japanese banks becoming technically insolvent by stating that the recent declines in equities have had only a limited impact so far on major banks, and falling equity prices would not endanger banks' capital-adequacy ratios. According to the FSA estimates, the average capital ratio of major banks stood at 10.4% as of Friday, which is still above the 8.0% capital-adequacy ratio required by the Bank of International Sentiments. But the majority of independant analysts say the bad loan crisis is much worse than reported by the government agency, and given the slow pace of reform, traders are rightly worried about any further falls in Japanese shares.
USDJPY added to Friday's gains and rose to a 3-week high of 119.30, above Friday's global high of 119.05. That level is now seen as support followed by 118.75 and 118.50. Many dealers are now talking about a move back to the 120-121 range in the near term, with immediate resistance for USD/JPY found at today's high of 119.30 followed by 119.50, the 38% retracement of the decline from 125.89 (June 13) to 115.50 (July 16).
GBP/USD fell to a session low of 1.5635 after failing to regain the 1.57 mark in early Tokyo trade. Key for traders selling the pound on Friday was a second failure to sustain gains above the 1.5850 mark, for a second time (forming a technical double top). Sterling then fell below 1.5675, the 62% retracement of the 1.5555 to 1.5865 rally, which is now acting as resistance. This technical failure could open the way for a test of Friday's low of 1.5615 and the previous lows of 1.5585 and 1.5555.
The Swiss franc also remains under pressure after Friday's surprise move by the Swiss National Bank to cut its 3-month LIBOR target range by 50 basis points in an attempt to curb the franc's appreciation, for fear that the rising franc could hurt Swiss exports to the Eurozone.
USD/CHF again tried to break 1.47 resistance, which marks the 62% retracement of the 1.4930 (July 10) to 1.4357 (July 22) decline, but failed. However, the dollar held well above preliminary support at 1.46 followed by key support at 1.45 which should contain any correction from Friday's sharp 3.5 centime rally, sparked by the SNB rate cut.
The SNB's move led to speculation that other central banks may also cut interest rates to allay the recent turmoil in global markets. Speaking on Swiss television, SNB Chairman Jean-Pierre Roth reiterated the vulnerability of Swiss exports to a strong franc and added that the bank has revised the 2002 economic growth sharply downwards.
The ECB and the Bank of England will be making their interest rate announcements on Thursday. Both central banks are expected to maintain rates at current levels, despite the move by the SNB on Friday.
However, key to understanding the dollar's rally on Friday was fear that the slowdown in US growth would pose a far greater threat to other countries, which were counting on strong US growth this year. In the meantime, traders will continue to monitor movements on Wall Street and will pay attention to a series of US economic data due later in the week, consisting of July Consumer Confidence, Q2 GDP, Fed Beige Book, July ISM, June Consumption, July Labor Reports, and June Factory Orders.