Monday, June 09, 2008

06/09/2008 09:30 AM

Daily FX Strategy

Risk appetite is improving from Friday’s activity, while the dollar falls across the board with the exception of the Japanese yen, which is the broad loser in this morning’s trade. Oil is about $2 below Friday’s $139.20 per barrel high while gold hovers at 1-week and half a high at $909 per ounce. The $2.8 billion loss announced by Lehman is not hampering sentiment in equities as both Dow and S&P futures are up, albeit negligibly so. We expect the themes of prolonged dollar weakness and oil strength to hover during the lack of any market moving data as Friday’s US labor report sends a reality check to what have long deemed as premature market expectations for a Fed rate hike.

Over the past 5 weeks, Federal Reserve officials had given the market a case of deja-vu of last year’s developments when they stepped up their anti-inflation rhetoric in the midst of weakening fundamentals until they were forced to slash interest rates. The main difference between today and last year is the massive amounts of liquidity pumped by the Fed and other major central banks, which have served in containing any implosion of systemic risks. Nonetheless, the risks of further bank and hedge fund losses are by no means eliminated, especially when as equity markets display losses as great as Friday’s moves. At the end of day, we stick with our expectations for at least one more rate cut of 25 bps from the Fed to 1.75%, with chances for a 1.50% print by year-end at 40% chance.

Markets await the 10.00 am release of the April NAR pending home sales, expected to drop 0.5% following a 1.0% decline.

USDJPY Recovery Remains Limited at 106.60

As notable the rebound in the USDJPY may prove, the pair is proving to be following an upward consolidation that is likely to fail on renewed market dislocation occurring as a result of macroeconomic concerns. We reiterate our thesis that prolonged macroeconomic weakness is to dictate equity market volatility during the absence of earnings report, where the elements of expectations, guidance and dollar weakness have co-existed in averting damage over the last earnings season. Interim upside stands at 106.00, followed by 106.30.

Traders must also be aware of Friday’s 5-point jump in the VIX measure of volatility, which was the biggest single-day rise since August of last year. Since those large single-day upmoves were followed by further increases in the VIX and subsequent losses in equities, the set-up remains ripe for renewed declines in yen crosses, including USDJPY. Support climbs to 105.70, backed by 105.40.

Sterling Eyes $1.9830

Cable rallies on a case of predominant dollar weakness rather than improved sterling fundamentals, which sets up for a possible snapback below 1.97 and 1.9660. The extent of upside in the pair may extend to as high as 1.9880, which is the 50% retracement of the 2.04-1.9360 love. Nonetheless, this week’s release of UK manufacturing/industrial production may once again disappoint and recall the bears.

EURUSD Supported at $1.57

We’re unlikely to see the euro to follow on Friday’s gains as oil prices retreat, albeit modestly. We cannot attribute Friday’s euro gains entirely to the oil bounce, which was largely a result of bellicose remarks from the Israeli minister calling for an attack on Iran. The labor report served to clear the way for at least one more rate cut. While the day’s renages are likely to be confined to 1.57-1.5770, the final hour of trading in US equities will be paramount in whether the indices can hold on to any intra-day gain rebound.

Analyst Bio

Ashraf Laidi, Chief FX Analyst at CMC Markets, oversees the analysis and forecasting functions of key currency pairs as well as decisions and trends of the major global central banks. Mr. Laidi is also responsible for education and informing clients on the essential dynamics underpinning FX markets.

Prior to joining CMC, Mr. Laidi has worked for such varied organizations as the United Nations, the World Bank, and Reuters. Mr. Laidi regularly provides expert opinion to various electronic, print and the broadcast media outlets.

Mr. Laidi has appeared regularly on CNBC-TV, Bloomberg TV, the BBC and PBS’ Nightly Business Report. His insights also appear in the Financial Times, The Wall Street Journal, Barron’s, The New York Times, CBS Marketwatch, TheStreet.com, Futures Magazine and a host of other international publications.