No respite for dollar longs as the trading week started out much the same way that last week ended with the greenback weak across the board.
Talking Points
• Japanese Yen: breaks 105.00 as risk aversion persists
• Euro: Trades above 1.5800 as anti dollar flows continue
• British Pound: Sidelined form most of the night
• Canadian Dollar: GDP on tap
• US Dollar: Chicago PMI on tap
Dollar Dumped Across The Board, Aussie at 25 Year High – Parity Next?
No respite for dollar longs as the trading week started out much the same way that last week ended with the greenback weak across the board. The EURUSD rose to 1.5830 while USDJPY broke below the 105.00 figure as risk aversion continued to dominate flow. Record high oil prices have soured demand for equities as investors now fear an onset of a global economic slowdown with a risk of a possible recession looming on the horizon in the second half of 2008. Over the past few days several financial services firms have issued dire warnings regarding present dangers to global economic growth and their research has weighed on speculative sentiment in the FX market.
As to the EURUSD we noted in our weekly that, “If US employment situation deteriorates more that the market expects (and given the recent trend in jobless claims there are good reasons to think that it will) the prospect of Fed rate hikes will dim even more. Therefore the combination of progressively worse US economic data along with relentlessly restrictive ECB monetary policy may create even more weakness for the dollar in the days ahead and lay the foundation for another run at all time highs.”
On the economic front the EZ headline CPI numbers tonight printed at 4.0% vs. 3.9% projected providing further support to ECB’s hawkish policy stance, Inflation in the region is now running fully 200 basis point above ECB targets and the monetary authorities in Frankfurt are likely to redouble their efforts to maintain a restrictive monetary policy for the foreseeable future.
Meanwhile, the AUDUSD has enjoyed a stealthy, quiet rally and now stands at 25 year highs. The unit broke the previous high of 9655 in overnight trade and now stands ready to challenge the 9700 barrier. Although the Aussie sports one of the highest yields in the industrialized world, the unit latest strength is most likely a manifestation of anti-dollar flows rather than internal strength. If dollar weakness persists, the AUDUSD could reach parity on pure momentum alone, however we are skeptical about its longer term prospects.
No economy is more leveraged to the global growth cycle than Australia. As the primary supplier of commodities to China, the country has enjoyed meteoric economic growth over the past 3 years. However, if China’s two biggest customers – EZ and US - will begin to curb demand then China’s appetite for Australian goods will decline rapidly, most likely leading to a less restrictive RBA monetary policy in 2009. Parity in AUDUSD could happen, but we doubt that the unit could sustain those values unless the USD collapses completely.
Certainly the economic prospects for the buck do not look promising. Today the US calendar brings the Chicago PMI data which may be a precursor to the national ISM manufacturing report later in the week. The market expects a decline to 48.4 from the 49.1 the month prior and should the report miss to the downside it would only exacerbate the anti-dollar sentiment that pervades the market already.
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