eur fundamentals

US Dollar, Japanese Yen Face Downside Risks as US Stress Test Results Benefit Carry Trades

Thursday, 07 May 2009 21:31:24 GMT  |  Terri Belkas, Currency Strategist

The US dollar and Japanese yen spent much of Thursday under pressure as volatile price action in currencies like the euro and British pound drove much of the FX market’s direction. These moves are likely to continue overnight following the release of the official results of the US government’s stress test of the 19 largest financial institutions. Results were largely in line with expectations, as 10 of the 19 will require additional capital amounting to $74.6 billion, including: Regions Financial ($2.5 billion), GMAC ($11.5 billion), Suntrust ($2.2 billion), Keycorp ($1.8 billion), Bank of America ($33.9 billion), Citigroup ($5.5 billion), Fifth Third ($1.1 billion), Morgan Stanley ($1.8 billion), PNC ($0.6 billion), and Wells Fargo ($13.7 billion). Banks determined to meet capital requirements include: Goldman Sachs, JPMorgan Chase, Metlife, American Express, State Street, BNY Mellon, BB&T, Capital One, and US Bancorp.

The US dollar is likely to see choppy price action yet again on Friday. Based on both a Bloomberg News poll of economists and a variety of leading indicators, the 8:30 ET release of US non-farm payrolls (NFPs) is likely to show job losses for the sixteenth straight month in April, but the rate of decline is anticipated to slow. At the time of writing, Bloomberg News was calling for NFPs to plunge by 600,000, but looking at the range of estimates, economists are anticipating that NFPs could fall anywhere between 360,000 and 750,000. Based on the improvements we’ve seen in leading indicators like initial jobless claims, consumer confidence, and the employment components of ISM non-manufacturing and ISM manufacturing, we expect that NFPs may drop somewhere in the range of 500,000 to 600,000.

That said, the steady accumulation of job losses does not bode well for economic growth going forward and indicates that the unemployment rate will continue to climb. In fact, for the April reading of the rate is projected to rise to 8.9 percent, the highest since September 1983, from 8.5 percent. At the same time, initial estimates of Q1 GDP for the US showed a 2.2 percent jump in personal consumption, after spending contracted for the previous two quarters, suggesting that aggressive discounting by retailers has been able to counter the impact of falling incomes, to a certain degree. In coming months, it will be important to get a sense if the rising optimism amongst consumers – which has been focused more on the economic outlook than current conditions – can remain robust even if growth doesn’t bounce back in the second half of the year.

From a technical perspective, the daily charts of the US dollar index shows that the currency is going to face major support at the confluence of the 200 SMA and a rising trendline at 83.13. As a result, it will be important to watch how the US dollar responds to this pivotal level, as a breakdown in the greenback would signal a significant bearish turn in the currency across the majors. On the other hand, a failure and subsequent retracement could indicate that the US dollar is due for a broad rebound. Likewise, the Japanese yen crosses face hefty hurdles in the near term, with EUR/JPY facing immediate resistance at the 200 SMA (132.84) and GBP/JPY facing the psychologically important 150.00 mark.

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar


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