Monday July 7, 2008
The dollar maintained a firm tone, with the G8 meeting encouraging demand on dips. EUR-USD made an early challenge of 1.5600, but failed to clear 1.5610 support amid sovereign account demand on dips. GBP traded on a soft footing, with weak economic fundamentals illustrated by a sharp fall in U.K. manufacturing production, which saw Cable record 1.9668 lows. Elsewhere, CHF and JPY traded on a softer footing amid firmer equity markets. Ongoing Japanese interest for USD-JPY and the high yielders was noted, with seasonal flows supporting both the dollar leg and the JPY crosses. This activity was expected to continue until the end of July and helped USD-JPY up to 10-day highs of 107.70.
EUR-USD traded on a heavy footing, making an early challenge of technical support at 1.5610 as the dollar made broad based gains, continuing its improved performance since last Thursday's as-expected U.S. NFP release. However, good bids from sovereign backed account supported the pair, encouraging a short covering rally back in to 1.5650. The overall tone remains negative though, with the dollar gaining some support as the three-day G8 meeting in Tokyo gets underway, which is expected to feature oil prices and global inflation. The market will also look for reclarification on the dollar policy after a plethora of supportive comments of late since Bernanke's remarks on the dollar and commodity prices in June. Fundamentally, EUR-USD may remain on the heavier side, with narrower yield spreads also influencing after last week's ECB shift to a neutral policy stance following the 25 bp hike. A break below 1.5600 would see speculative accounts target a close below the 100-day moving average at 1.5550, although the influence of sovereign account demand on dips is limiting any pullback. Elsewhere, German May industry output fell 2.4% m/m, which was much weaker than expected, while May manufacturing output showed a 2.6% m/m fall.
GBP was forced lower after weak U.K. data, with May industrial output falling 0.8% m/m and down 1.6% y/y, while manufacturing output fell 0.5% m/m and 0.8% y/y. Cable recorded 1.9668 session lows and EUR-GBP rallied to 0.7959 highs. The Cable move below the 55-day moving average at 1.9707 should leave risk on the downside intra-day as position traders try to fashion a weak close. The fundamentals argue for further weakness, with economic conditions deteriorating and GBP pressured after a wave of negative weekend press. The majority of analysts now expect the BoE to remain on hold according to a Reuters survey and this was backed up by headlines in Sunday Times and the Sunday Observer. Meanwhile, the WSJ focused on U.K. layoffs and an Economist article by columnist David Smith said that the economy was running on nearly empty, citing the potential for a technical recession. Intra-day price action should see Cable meet sellers from 1.9740-50 now, with focus on stops through 1.9650-60.
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