The positive dollar impact of yesterday’s coordinated central bank operations is already proving unsustainable as the US currency falls across the board, lifting the euro to less than a third away from yesterday’s all time high of $1.5496. The euro high was reached minutes after stronger than expected ZEW sentiment survey from Germany , but reversed all of those gains immediately after the central bank liquidity injections.

Currency Reserve Element Dragging the Dollar

The latest dollar selling is partly triggered by remarks from UAE finance minister mulling the depegging of the dirham away from the US dollar, while similar remarks are said to be coming from Jordan , something that we have not heard before from the Kingdom. As oil prices continue to prove the $109 area and the dollar testing new lows on a daily basis, the Arab nations of the Gulf will find it increasingly unsustainable to peg their currencies entirely to a falling dollar at a time when their imports from the Eurozone are accounting for a bigger share of total imports than they do from the US. UAE and Saudi Arabia have resorted to salary increases and price caps on foodstuffs, but these are proving unsustainable for the large expatriate and non-civil servant segments of the populations. While the most likely solution for these currency regimes would involve a move towards a basket of currencies of which the dollar will make up a large share, a collective announcement of such a move would be more than a symbolic blow to the dollar’s currency reserve status. Currency traders will deem this reserve element as an added reason to sell the dollar, in addition to the cyclical elements (related to falling US growth and interest rate differential) and structural elements (related to widening US budget deficit and existing trade deficit).

Today’s void from the lack of US economic releases will likely be filled by attention on US equities as all eyes will be on whether Tuesday’s sharp rally will maintain its momentum. At a time when the US dollar has fallen more than 20% in trade weighted terms over the last two years and US equities have shed 18-20% from their November highs is raising the alert among foreign investors especially as US equities have made up an increasing share of foreign financing of the US trade deficit. The sliver lining of the falling dollar was seen in yesterday’s release of the falling US trade deficit, but the downside is clearly illustrated in the rising oil portion of US oil imports, which has doubled to 18% over the last 6 years.

Euro Targets $1.5530

More good news on the euro front as Eurozone industrial production rose 0.9% in January, posting its first increase in three months, translating into a 3.8% increase on the year. Separately, French CPI grew by 3.2% in February, matching that of the entire Eurozone. ECB Gov Council member reiterated there is no room for easing monetary policy.

Despite the recent fundamentally driven strengthening of the euro, we expect further pullbacks in the euro emerging near the $1.55 level, which may see trigger a retreat to as low as 1.5250. While we anticipate ongoing consolidation inside the 1.5250-1.5550 range over the next two weeks, the downside risk to this assessment stems from further declines in gold prices, where tecnicals are increasingly suggesting a possible $925-930. We expect a 50-bp Fed rate cut next week to be the more likely possibility, which will prove short-term dollar supportive and gold negative.

EURUSD: eyes $1.5520 and 1.5555, with downward retracement seen supported at 1.5430 and 1.5470.

EURAUD: Renewed boost seen targeting 1.6700 especially amid an expected intensification of unwinding of carry trades, which is already under way, hitting the high yielding Aussie and Kiwi. Key resistance stands at 1.6770. This evening’s Aussie jobs data (8.30 pm) will be key in determining Aussie sentiment, expected to show the unemployment rate at 4.2% from 4.1% and payrolls down to 15K from 27K.

EURCAD: The pair broke below the 1.52 trend lime support after hitting a fresh 10-month high at 1.5370. Support emerges at 1.5150, followed by 1.5080. Prolonged expectations of further easing from the Bank of Canada are seen providing renewed boost towards the 1.52 handle.

Falling USDJPY Eyes 102.00

The post-Fed liquidity rebound in USDJPY to 103.40 quickly proved a thing of the past as the pair dropped towards the 103 figure in Asian trade before breaching the figure in early European trade. Aside from reduced renewed erosion in USD sentiment, the pair is boosted by strong Japanese Q4 GDP revision at an annualized 3.5%, beat expectations of 2.3%. The yen rose after the report damped speculation that the Bank of Japan would have to cut interest rates later this year.

Yen strength continues to shrug indecision by Japanese government officials regarding the appointment of the new Bank of Japan Governor. We expect a rebound towards the 102.70s to be exploited for renewed selling towards 102.50s and 102.30.

Shaky Sterling Nears $2.0100

We caution GBP longs amid the deteriorating sterling fundamentals that are being currently shadowed by the negative USD story. A deteriorating showing in Wall Street will likely drag the pair lower to $2.0120 and onto 2.0080. Traders haven’t forgotten yesterday’s release of the RICS’ index falling to the worst level since 1990. We do not expect any fireworks from the UK budget as attention remains on risk appetite and implications for the high yielding GBP.

Interim support stands at the $2.0140 trend line support, while a breach will likely test 2.01. A close below 2.0050 today will likely lead the way towards 1.9950 in tomorrow’s Asian trade. Upside remains capped at 2.020.