NEWS / Foreign Exchange

Bernanke Pressured to Explain "Adjustment" on Wednesday

The unexpected 3.9% drop in US February new home sales to 848K following the revised 15.8% tumble in January dismisses the notion of stability in the US housing slowdown, while triggering the classic play of falling risk appetite, i.e. an all round rally in the yen, at the expense of a selloff in US equities. New home sales fell to their lowest level since June 2000 while the months supply rose to 8.1, the highest in 16 years.

Most significantly, the home sales report should place the burden on Fed Chairman Bernanke to come up with a more detailed assessment regarding the deterioration of the US housing slowdown beyond simply describing it as ???adjustment in the housing sector is ongoing??? as was done in last week??™s FOMC statement. Mr. Bernanke may not be expected to sound off the usual sanguine tone on housing and the economy, especially when testifying to a group of anxious lawmakers, who are representing constituencies affected by the sub-prime fallout. As Mr. Bernanke gives a more detailed view on the Fed??™s downgrading of the housing sector, we expect the market to continue dragging the dollar lower and trigger further yen gains.

Tuesday??™s figures on US consumer confidence and US Home Price Index should especially further endanger risk appetite and extend the sell-off in the dollar and equities to the favor of the yen.

US Dollar Index bearishness intact

As we mentioned in this morning??™s analysis ???Euro nears stabilization point??? and ???Fiscal year-end repatriation to support JPY???, our assessment of a near-term peak in the dollar bounce has materialized. The technical argument is explained by the short-term rebound in the US dollar index, which failed to breach above the neckline of the head-and-shoulder pattern at 83.40??”a bearish signal in the pattern. This failure is now validating the H&S formation as the USDX is dragged below the 82.80 level, which should call up the 82.30 low of December.

The report is likely to limit any rebound in USDJPY to 118.40 particularly if a continued sell-off in US equities (decline of more than 1.3-1.5% in S&P and Dow) triggers similar proportional downside in Asian equities tonight. We expect interim resistance at 118.20 to give way to 118.40, but deteriorating losses in equities should maintain support at 117.80 and 117.50.

EURUSD is in line with our assessment indicating:??? we do not see any fundamental argument specific to the Eurozone that validates further EUR declines below the 1.3250-55???. Indeed, EURUSD held up at 1.3256 before the home sales-led rebound to 1.3350, which is the 61.8% retracement of the 1.3409-1.3255 decline. A deterioration in US equities coupled with renewed yen gains is likely to limit EURUSD between 1.3320 and 1.3350.

GBPUSD breaks well above our stated resistance of 1.9650 largely on the back of the US data and the rebound in EURUSD. Profit-taking is likely to drag the pair back towards previous resistance of 1.9650, which is now seen as interim support. Expect 1.9660-1.9700 range to act for rest of day. Downward bias likely to return in higher yield sterling in event of deterioration of equity sell-off.