NEWS / Foreign Exchange

The USD resuming its downtrend or not?

The past week has once again offered plenty of trading opportunities with lots of volatility, breaks of levels and comments from officials. The two big themes have been the potential spill-over effects from the deterioration of the US sub-prime mortgage market and the return of the JPY.

Our Index of Weekly Economic Indicators is about to post new highs. That would be a bit surprising to someone following the debate about the US housing market and mortgage spill-over effects, but the fact remains: The non-housing sectors of the US economy are doing fine and inflationary pressures are still intact as indicated by this week??™s releases. PPI Ex Food and Energy was out at 2.5% YoY and CPI Ex Food and Energy out at 2.7% YoY. But for how long will inflation remain high? With the financial media beginning to talk about a coming consumer crunch and continuously weak figures from the US housing market, if might only be a question of time, before it becomes a self-fulfilling prophecy.

When looking at EURUSD, if seems that the market has already begun to price in a potential scaling back of consumer spending as a result of the sub-prime spill-over effects. This is exactly a confirmation of our view on the US economy by the end of the year. In our Yearly Outlook, we called for a recession by year-end and build our case on a study conducted by the Federal Reserve on the international experiences with topping housing markets since 1970. All the major economic indicators ??“ except consumer spending - have been developing in accordance with this study in the past 4-8 quarters.

Another reason for the recent strength in EURUSD can be found in our proprietary Index of Monthly Indicators for the Euro-Zone.

The last value of the index is not fully updated, but there is no doubt that we are currently seeing a bout of strength. Yet another reason for EUR strength is the fact that the notion of risk is getting back into the market. Both increased JPY volatility and the collapsing mortgage-related stocks are contributing to this notion.

EURHUF

We are long from 249.83 with a target of 266 and a stop at 247.72. This cross should do quite well, if the Carry Trade begins and unwind in a dramatic way and at the same time, the risk-reward is convincing at these levels and this close to key support at 248. Especially on CHF strength, we would expect HUF to go lower, since the Hungarian mortgage market is heavily involved in CHF financing.