The Yen rose against the Dollar and Euro on Wednesday as weaker stocks and an unexpectedly softer September US existing home sales report caused investors to flee risky assets. This bigger-than-expected 8% drop to a 9-year low in September has reinforced expectations that the Fed will have to cut interest rates again next week.
Merrill Lynch’s write-downs, related to problems with sub-prime mortgages, and news that sales of previously owned homes dived to a record low annual pace of 5.04 million units in September were seen cementing the case for a Federal Reserve interest rate cut next week.
Markets have fully priced in the Fed cutting rates by 25bp from 4.75% at its Oct. 30-31 policy meeting.
News and Events:
The Yen rose against the Dollar and Euro on Wednesday as weaker stocks and an unexpectedly softer September US existing home sales report caused investors to flee risky assets. This bigger-than-expected 8% drop to a 9-year low in September has reinforced expectations that the Fed will have to cut interest rates again next week.
Merrill Lynch announced a $7.9B in write-downs, related to problems with sub-prime mortgages, stemming from home loans in the United States to people with poor credit histories. Merrill Lynch’s write-downs and news that sales of previously owned homes dived to a record low annual pace of 5.04 million units in September were seen cementing the case for a Federal Reserve interest rate cut next week, adding to the dollar’s woes. Merrill Lynch’s write-downs reminded investors of the troubles in the credit markets and helped to push U.S. and European equity markets lower. That also sparked speculation that a similar fate awaited other big U.S. financial institutions.
U.S. short-term interest rate futures show investors have fully priced in the Fed cutting rates by 25bp from 4.75% at its Oct. 30-31 policy meeting. The Fed slashed its benchmark fed funds target rate by half a percentage point last month. That contrasts with Europe where investors expect the European Central Bank to keep interest rates flat at 4.0 percent well into 2008 as policy-makers gauge the slowing of the economy.
UsdJpy was down 0.76% at 114.04, after touching a session low of 113.82. The EurJpy fell 0.73% to 162.63. It hit an intraday trough of 161.71.The EurUsd was flat at 1.4262. GbpUsd was also unchanged for the day at 2.0490 after touching intraday 2.0426 low. The NzdUsd traded 0.24% down at 0.7541 after the central bank left interest rates unchanged as expected.
Today’s Key Issues (time in GMT):
08:00 EUR Oct Germany IFO � Business Climate 103.8 vs 104.2
08:00 EUR Oct Germany IFO � Current Conditions 109.4 vs 109.9
08:00 EUR Oct Germany IFO � Expectations 98.4 vs 98.7
12:30 USD Sept Durable Goods Orders 1.5% vs -4.9%
12:30 USD Sept Durable Goods Orders ex-trans 0.7% vs -1.8%
12:30 USD Oct 20th Initial Jobless Claims 320k vs 337k
14:00 USD Sept New Home Sales 780k vs 795k
14:00 USD Sept New Home Sales -3.1% vs -8.3%
14:00 USD Sept Help Wanted Index 22 vs 23
The Risk Today:
EurUsd hit new high 1.4349 on Monday. Last week break up 1.4280 opened the way through 1.4333 strong resistance. Next resistance holds 1.4400. On the downside, a return below 1.4280 former resistance and break down 1.4165 support may open the way down to 1.4000 nearby support and 1.3927 where a lower development would threaten the up-trend. On a long term view, it would need a return below 1.3719 to confirm trend change. Initial support holds 1.4165.
GbpUsd hit earlier Monday a new 3-month 2.0539 high. Initial resistance still hold 2.0500 key level. On the downside, it would need renewed pressure below 2.0200 and further weakness toward 2.0000 psychological level and 1.9880 support to confirm trend change. Beyond that point, 1.9821 marks strong support (76.4% retracement of 1.9652 to 2.0366 advance).
UsdJpy looks negative following Monday 113.26 low test. Further drop might follow toward 112.61 and retest of ultimate 111.60 (August 17 low). On the upside, it still need a confirmation over 117.63 resistance to open the way for further extend toward 119.06 (61.8% retracement of 123.67 to 111.60 decline). Key support holds 114.
UsdChf dropped down to 1.1602 on Monday. Initial resistance holds 1.1790 (23.6% retracement of 1.2477 to 1.1577 decline) and strong resistance 1.1923 (38.2%). However, recent downtrend development below 1.1680 key level may reopen the way toward 1.1500 psychological support and possibly 1.1484 (2005 March 14 low).
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Resistance and Support:
By Jean-Claude Braha - ACM Advanced Currency Markets, Geneva, Switzerland