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February 28, 2008

Euro Rally Seen Broadening
by Ashraf Laidi

Quiet FX sessions in Asian and European trade as markets turn to the revised US Q4 GDP figures and the increasingly relevant weekly claims on unemployment insurance both due at 8.30 am. EUR eased off yesterday's $1.5145 highs to $1.5100 as dollar selling somewhat stabilized but the overall tenor remains largely USD negative.

Euro Unlikely to Drop Below $1.50 Soon
More positive news from the Eurozone's largest economy as German unemployment dropped to 8.6% in February from 8.7% in January, while the number of unemployed fell by 75K people, exceeding forecasts of 50K decline. Aside from the fundamental underpinnings (back to back business sentiment strength from IFO survey and rising Eurozone inflation), the euro's rise against the dollar is seen maintaining momentum as not only it is part of a broader USD weakness courtesy of the Fed's willingness to compromise inflation for further rate cuts, but also part of a wider euro rally. This is clearly seen in the euro's notable rally versus strong currencies such as AUD and NZD.

The other reason the euro is expected to maintain, if not add to rising momentum, is that the ECB is unlikely to jawbone the recent run up due to the advantages of currency strength in containing the costs of soaring oil prices. With Eurozone inflation more than a full percentage point above its preferred 2.0% inflation ceiling, this rally is here to stay. As for concerns as to whether the currency is too strong for the Eurozone, the euro's trade weighted index against 12 currencies has not yet regained the highs of mid January.

Excluding any jawboning from Eurozone politicians, we expect EURUSD to remain underpinned at 1.5060 backed by 1.5020. Today's US data carry the potential of boosting the pair towards $1.5120, followed by 1.5145.

EURCAD: We add to our Tuesday call favoring EURCAD as CAD bullisness is seen on the wane ahead of Tueasday's BoC rate decision. We expect the bounce to reach towards the 50-day MA of 1.4815, followed by 1.4855. Downside risk to this strategy emerges from potential jawboning by the ECB regarding the euros' currency strength. Drastic calls from political figures such as French Pres Sarkozy may also temper the current boost to the currency, but we expect ECB hawkishness to prevail especially at a time when soaring oil prices are fuelling the already rising inflationary pressures. Possible target stands at 1.49 next week, with key foundation stands at 1.4640.

EURGBP: Now that the pair has broken above our previous objective of 75.75 to 76.10, we see interim retreat towards 75.85 and 75.70, where stability is expected to be established. Before renewed run-up towards the 76.00 figure.

EURNZD: The pair has risen past our objective of 1.8520 and 1.8595 to 1.8620. we expect further gains in the euro vs the kiwi as due to 1) the decline in New Zealand's Business Confidence index, which tumbled to 9-month lows in February to -43.9 from -4.9; 2) potential nervousness causing general drag on high yielding AUD and NZD against lower yielding currencies 3) contrasting momentum play between EUR and NZD. We look for further upside towards 1.8620, and onto the 50-day MA at 1.8660.

Sterling Rebound Capped at $1.9890
Since sterling's rally has occurred largely on the back of USD weakness, we consider this an unconvincing sign for cable, which remains bearish in our view. But we cannot discount the possibility of further US data weakness, which could be an issue if US GDP comes in below 0.8% and weekly jobless claims rise above 350K. Upside capped at $1.9870, followed by 1.9890. Support stands at 1.9830.

USDJPY Awaits US Data and 1395 S&P
We maintain our medium term bearishness in USDJPY despite the pair's sharp breach of the 4-week trend line support of 106.80, which we now expect to act as interim resistance on the current 106.40s. Upside to remain pressured at 106.70. USDJPY support seen retesting 105.90, with key foundation at 105.45.

It is important to bear in mind the S&P500 and whether it is able to breach above the key 1,385-90 levels, which are the 50-day MA, 3-month trend line resistance and 50% retracement of the decline from the November 12 high to the January 23 low. Stochastics indicate a possible excess in momentum at the said level. Strength of the rally shall be tested against whether the index closes above 1,395. Failure to do should keep NZD under pressure and boost the EURNZD pair.

Ashraf Laidi
CMC Markets NA

Ashraf Laidi is the Chief FX Analyst at CMC Markets NA.

This publication is intended to be used for information purposes only and does not constitute investment advice. CMC Markets (US) LLC is registered as a Futures Commission Merchant with the Commodity Futures Trading Commission and is a member of the National Futures Association.

Copyright © 2006-2008 Ashraf Laidi

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