The euro slipped further away from its $1.29 perch on a combination of verbal jawboning from the European Central Bank and a gloomy ZEW survey on German and Eurozone economic sentiment. The ZEW survey lost more than 17 points tumbling below the long-term average (see more details in EUR section) as businesses expressed worries on oil and the overall outlook for the economy.

The retreat in oil also helped the dollar as US crude futures dropped further below $48. Gold hit a fresh 15-year high above $436 per ounce before edging back to $435 while the 10-year yield stood at 4.23%. Yields on the 2-year note edged up to 2.82% from 2.79% in anticipation of a 25-bp rate hike by the Fed tomorrow.

Will the Fed mention the Deficit?

The high certainty that tomorrow’s Fed decision will produce a quarter point rate hike in the Fed funds rate to 2.0% is not helping the dollar. We expect the Fed to issue a policy statement similar to the one in the September FOMC meeting. We only see a modest dollar rally in the event that the Fed improves its assessment on labor markets and oil. Nonetheless, if the Fed does include a remark on the widening trade deficit, then it is safe to expect a renewed run on the dollar. That is especially the case if the September deficit surges above $55 billion mark. The dissenting rhetoric vis-a-vis the dollar between the Fed and the US Treasury has become protracted to the extent that it drew the attention of European central bankers (see below).

Euro adrift as ECB weighs in

ECB officials stepped up their concern with the impact of the rising euro on the economy. ECB Counciul memner (head of Austria’s central bank) reiterated Trichet’s vie against brutal FX changes but added he was “not too pessimistic” on the Eurozone ‘s ability to weather the euro’s appreciation. Most interestingly, Liebscher said it was NOT helpful for the US Treasury and the Fed expressed differing views on the dollar. Liebscher was talking at the Treasury’s continued ”strong dollar policy” and the Fed’s recent indirect talking down of the dollar.

Meanwhile ECB Chief Economist Issing underlined the anti-inflationary advantages a strong euro when he said there are good prospects for inflation falling below 2.0% in the medium term, but he also pushed his growth estimate to the lower end of the 2.0-2.5% growth range.

Germany’s ZEW research institute’s economic sentiment index tumbled by 17.4 points to 13.9 in November from +31.3 in October, exceeding analysts' expectations for a much more modest fall to 29.5. The index is now well below its historical average of 34.6 points. The ZEW Institute said “the experts expect economic growth to slow down in the period up to May of next year [due to] an expected worldwide economic slowdown and the very distinct appreciation of the Euro which has taken place recently and which could prove a burden for German external trade”. The ZEW’s economic expectations index for the Eurozone also declined, reaching shedding 15.5 points to a reading of 22.1.

With eyes set on the $1.30 figure, euro resistance stands at $1.3030 and 1.3050.. Support lifts up to 1.2830-35, followed by 1.2790 and 1.2740-50.

Yen nears 105

Japan’s Finance Minister Sadakazu Tanigaki reiterated his stance against rapid yen appreciation
saying authorities would act in the FX markets if currency movements vary from fundamentals. But traders are unlikely to be intimidated in the medium term from any BoJ intervention especially as the Bank is preparing markets to expect positive inflation next quarter.

USDJPY hit a fresh 7-month low at 105.27, nearing our 105.20 20 target. A breach below it clears the way to the April 13 low of 105.05. Any intervention-backed rally is capped at the following targets of 106.00 and 106.30.

GBPUSD awaits inflation report

Although the UK trade gap narrowed to 4.55 bln sterling in September, from 5.2 bln stg, markets’ attention was fixated on Chancellor of the Exchequer Gordon Brown who appeared to be set on downgrading his growth forecasts. In a speech at the Confederation of British Industry's annual conference, Brown expressed businesses’ concerns about the global growth in light of rising oil prices, Middle East uncertainty and structural imbalances.

Prior to tomorrow’s trade balance from the US and the Fed meeting, markets will scrutinize the Bank of England quarterly inflation report (due at 5.30 am NYT Wed). At its last report in August, the BoE said it expected inflation to drop “back in the near term and gradually increases thereafter in response to pressures on supply and moderating downward pressure from import prices, reaching the 2% target around two years ahead”. Most interesting will be the Bank’s interim inflation outlook. A benign outlook would imply no more rate hike for the year, thus keep sterling at a disadvantage relative to the euro.

Cable retreated off its latest 4-month high to hover around the $1.8570s. Room for renewed resistance remains at $1.86, followed by $1.8667. Support to start at the previous $1.8515—61.8% retracement of the $1.9140-1.7479 move, followed by $1.8420s. Target follows at 1.8375 and 1.8315—the 50% retracement of the said move.

Loonie awaits Fed and Canadian trade balance

The loonie pushed lower, breaking a 4-day winning streak. Aside from the Fed and US trade data, traders will watch Canada’s trade figures expected to show the September surplus to have slipped to CAD 7.0 billions from CAD 7.4 billion. Expect the CAD to see only modest declines if the Fed adopts a sanguine statement.

USDCAD upside seen at 1.2030 and 1.2055-60. Key resistance remains at 1.2080. Support seen at 1.19 and 1.1830. Upside starts at 1.2070 and 1.2150.

Aussie awaits Fed

Continued optimism over a possible rate hike this year following yesterday’s policy statement from Reserve Bank of Australia is providing the Aussie with added support. We could see the currency gain towards the 76.90ss tomorrow in the likely event that the fed’s much anticipated rate hike is welcomed by USD bears. Once the US trade/Fed currents are over, Aussie traders will turn to the October employment report due Wednesday evening expected to show a drop of up to 30K jobs following a rise of 63.5K. Jobless rate seen unchanged at 5.6%.

Resistance starts at 76.50, followed by 76.88 and 77.20. Support emerges at 75.50, followed by 75.33—the 61.8% retracement of the 80.02-67.73 decline. A breach below 75 sees foundation at 75.20.

No Key Data

The dollar continued to recover in early Tuesday trading, following a combination of verbal intervention from Eurozone and Japanese officials. Yesterday’s comments from ECB Chief Jean-Claude Trichet, which he referred to the euro’s appreciation as ‘brutal’, provided the dollar with slight reprieve from its recent sharp sell-off. With no economic data slated for release today, traders will look ahead to tomorrow’s FOMC monetary policy meeting. With a 25-bp Fed rate hike already factored in, markets will scrutinize the accompanying statement for hints on the likelihood of another 25-bp hike at the December meeting.

Euro Slips on ZEW

A weaker than expected German ZEW survey pulled the euro lower in London trading, briefly dipping beneath the 1.29-level. Germany’s November ZEW expectations indicator fell to its lowest level in nearly two years and sharply undershooting consensus forecasts of a fall to 30.0, with a reading of 13.9 down from October at 31.3. The current conditions component improved to –57.8, versus –58.9 previously. The ZEW said the euro’s appreciation fuelled pessimism on world economic growth outlook and German exports.

The euro retreated to the 1.29-level against the dollar. Support is eyed at 1.2880, followed by 1.2840 and 1.28. Subsequent floors are seen at 1.2770, backed by 1.2730 and 1.27. Gains will target resistance at 1.2940, backed by 1.2980 and 1.30. Additional ceilings are eyed at 1.3030, followed by 1.3065 and 1.31.

Cable Retreats

UK September global goods trade gap narrowed to 4.546-bln sterling, versus forecasts of 5.1-bln sterling. Meanwhile, the non-EU goods trade gap narrowed to 2.377 bln sterling. Narrowing the trade gap was a spike in UK exports for September, which jumped to its highest level in two-years.

Cable finds support at the 1.85-level, backed by 1.8460 and 1.84. Subsequent floors are seen at 1.8370, followed by 1.8340 and 1.83. Gains will find resistance at 1.8580, backed by 1.86 and 1.8625. Additional resistance is eyed at 1.8660, followed by 1.87 and 1.8740.

Dollar/yen Edges Up

Japan’s FinMin Tanigaki said that the government would act on forex if currency rates deviated from economic fundamentals. The pair managed to edge up higher toward the 106-level overnight.

The pair holds steady near 105.80, with resistance seen at 106, backed by 106.40 and 106.80. Subsequent ceilings are seen at 107, followed by 107.35 and 107.70. Meanwhile, interim support begins at 105.40, followed by 105 and 104.65. Additional floors will emerge at 104.20, backed by 104 and 103.70.

AUDUSD

The Aussie continued its retreat, backing away to 0.7555. Further losses find support starting at 0.7530, followed by 0.75 and 0.7460. A move lower will target 0.7420, backed by 0.74 and 0.7370. Resistance is seen at 0.76 and 0.7645. Additional gains will target 0.7690, followed by 0.7750 and 0.78.

USDCHF Regains 1.18

Dollar/Swiss bounced back above the 1.18-level, rising to a session high at 1.1850. Resistance is seen at 1.1860, followed by 1.19 and 1.1950. A breach higher will target 1.20, followed by 1.2080 and 1.2140. Losses will encounter interim support at 1.18, backed by 1.1760 and 1.17. Additional losses are seen tempered at 1.1640, followed by 1.1585 and 1.1530.

The dollar edged off its multi year lows on a combination of verbal intervention from the European Central Bank and drifting oil prices. The ECB finally showed some concern with the euro’s rise when bank president Jean-Claude Trichet said the currency’s sharp gains versus the dollar were "brutal" and "not welcome." Indeed, the ECB is contenting itself with the benefits of a stronger euro in limiting the inflationary effect of high oil prices. But the Bank will try to prevent the euro from breaching the $1.30 level, because once the level is breached, triggered stops could lift it to as high as 1.31

As the US-led forces pushed their way into the Iraqi city of Fallujah, US Defense Secretary Donald Rumsfeld said the offensive would "take time", while not answering whether the operation in Fallujah would be a "final showdown". With over 12,000 US troops involved, long drawn operation will raise the “human casualty” factor and add an extra risk on the UIS dollar. This would be especially the case if violence escalates into January, when the Iraqi elections are scheduled.

Trichet stands in the way

The euro came off its highs after ECB president described the latest euro moves as brutal. Drifting oil prices below the %50 level also helped improve sentiment. Traders turn to Tuesday’s ZEW sentiment survey from Germany is expected to have slipped in November to 30 from 31.3 after a slight increase in October. A figure below the 30 reading would pressure on the euro as it indicates that contractionary forces in the country are prevailing over the inflationary ones, thus preventing the ECB from tightening next month.

Should none of the key Euro politicians (Schroeder, Eichel, Chirac, Sarkozy or Prodi) show any concern this week, we could easily see the euro shatter the $1.30 level and onto to 1.3030. More importantly, traders should also watch for comments from ECB officials (Trichet, Papademos, Issing, Weber or Noyer).

With eyes set on the $1.30 figure, euro resistance stands at $1.3030 and 1.3050.. Support lifts up to 1.2830-35, followed by 1.2790 and 1.2740-50.

Yen quietly hits fresh 7-month high

With the all the focus on the euro and the ECB, the Japanese currency pushed across the board, hitting fresh 7 month highs at 105.27 and dragging the euro to 136.20 after 3 consecutive daily gains. Traders shall turn to Tuesday evening’s trade figures and Thursday evening’s key Q3 GDP report.

Having broken the 105.60 support, which is 61.8% retracement of the rise from the April 1995 low of 79.97 to the August 1998 high of 147.62, USDJPY sees key foundation at 105.20 20 target. A breach below it clears the way to the APRIL 13 low of 105.05. Any intervention-backed rally is capped at the following targets of 106.00 and 106.30.

GBPUSD retreats off $1.86

The dollar’s general bounce and the soft UK retail sales figures droved sterling down from its $1.86 perch. October like for like sales grew a mere 0.5% y/y from 2.0% in September. Sterling’s key event will be Wednesday’s release of the Bank of England quarterly inflation report. At its last report in August, the BoE said it expected inflation to drop “back in the near term and gradually increases thereafter in response to pressures on supply and moderating downward pressure from import prices, reaching the 2% target around two years ahead”. Most interesting will be the Bank’s interim inflation outlook. A benign outlook would imply no more rate hike for the year, thus keep sterling at a disadvantage relative to the euro. Traders will likely drag sterling’s to a fresh 10-month low against the euro into the 70-pence territory in the event of a benign inflation outlook.

Cable faces resistance at $1.8570, followed by $1.86 and $1.8667. Support to start at the previous $1.8515—61.8% retracement of the $1.9140-1.7479 move, followed by $1.8420s. Target follows at 1.8375 and 1.8315—the 50% retracement of the said move.

Aussie backs off for now

Aussie retreated off its latest 7-month high after the Reserve Bank of Australia identified short-term inflationary pressures. The Reserve Bank of Australia seemed to have pushed the door back open for potential rate hike, which is seen widely depending on oil prices. The Bank said it expected:” underlying inflation to “remain around current levels before rising gradually from early next year to around 2½ per cent towards the end of 2005 and to around 2¾ per cent by mid 2006.”It added that:“ it is expected to keep year-ended CPI inflation above underlying inflation over the next few quarters”. Although the latest quarterly inflation figure slipped to 2.4% in Q3 from 2.5%, well within the 2-3% target, rising oil could well require another dose of preventive tightening.

Support starts at 75.50, followed by 75.33—the 61.8% retracement of the 80.02-67.73 decline. Key support stands at 75. Resistance stands at 76.50, followed by 76.88 and 77.20.

At 11:50 AM Bank of Canada Deputy Governor Longworth Speaks

Although dollar selling let up slightly in a quiet overnight session, the currency remains mired near record lows against the euro around 1.2985 and a fresh multi-year low against the Swiss franc at 1.1760. Interestingly, not only did Friday’s unexpectedly strong US labor report fail to trigger a dollar rally, a sharp dumping of the currency subsequently ensued. Market sentiment for the currency remains heavily bearish, as evident from the CFTC futures data, which saw net buying in euro, Australian dollar, and Swiss franc at fresh record highs.

The coming week will see several key reports including US trade balance, GDP data from Japan, Germany and the Eurozone, and the BoE’s monthly inflation report. Also of note this week will be Wednesday’s FOMC monetary policy decision, in which the Fed is widely anticipated to hike rates by 25-bp to 2.0%. More importantly however, will be the accompanying statement, in which markets will scrutinize for clues as to whether another 25-bp hike may be slated for the December meeting. Nevertheless, with markets already pricing in a Fed hike this week, dollar gains may be short-lived and viewed as a better level to sell.

Euro Edges To Fresh All-Time High

Data from last week’s CFTC IMM futures data showed a surge in net buying of euro futures, jumping 17% for the week ending November 2 to a new record level at 53,465 contracts. The euro edged up to another all-time high versus the dollar in Asian trading, rising to 1.2986. Interim resistance begins at the psychologically key 1.30-level, followed by 1.3030 and 1.3065. Subsequent ceilings are seen at 1.31, backed by 1.3140 and 1.3180. Losses will target interim support at 1.2940, followed by 1.2925 and 1.29. Additional floors will emerge at 1.2880, backed by 1.2840 and 1.28.

Cable Firm at 4-mo High

Cable climbed overnight to its highest level since July against the dollar at 1.8573. Resistance is seen at 1.8580, followed by 1.86 and 1.8625. Subsequent ceilings are seen at 1.8660, followed by 1.87 and 1.8740. Support begins at 1.8530, followed by 1.85 and 1.8460. A move lower will target 1.84, backed by 1.8370 and 1.8340.

Yen Climbs Amid Muted Gov’t

Despite the yen rising to its highest level since April, the Japanese government remained uncharacteristically silent about the currency’s strength. While traders can never rule out the possibility of intervention from the BoJ, some shrug off its likelihood given the rationale that the latest move has been more a result of dollar weakness, rather than yen strength.

Dollar/yen traded in a narrow range near its lows around 105.40. Support starts at 105, backed by 104.65 and 104.20. Additional floors are seen at 104, followed by 103.70 and 103.40. Resistance starts at 105.75, followed by 106 and 106.40. A move higher will target 106.80, followed by 107 and 107.35.

AUDUSD

The Aussie backed off a bit against the dollar in early Monday trade. Resistance is seen at 0.76 and 0.7645. Additional gains will target 0.7690, followed by 0.7750 and 0.78. Losses find support starting at 0.7530, followed by 0.75 and 0.7460. A move lower will target 0.7420, backed by 0.74 and 0.7370.

Swissie Climbs to Fresh 8-yr High

The Swiss franc traded to a fresh 8-year high against the dollar overnight at 1.1760. Further losses will target 1.17, followed by 1.1640 and 1.1585. Additional floors are seen at 1.1530, followed by 1.1460 and 1.14. Resistance is seen at 1.18, followed by 1.1860 and 1.19. Subsequent ceilings are seen at 1.1950, backed by 1.20 and 1.2080.

No Key Data

Despite a surprisingly strong US labor report -- with a surge in payrolls nearly double the amount forecasted, underlying market sentiment remains skewed toward a weaker dollar. According to the CFTC IMM futures data, speculators continue to send net longs in euro, Aussie and Swiss franc to record levels versus the dollar. Furthermore, the greenback continues to tread near fresh lows against the euro and the Swiss franc. Meanwhile, the coming week will likely offer little reprieve for the dollar since a 25-bp rate hike from the FOMC has already been fully priced in.

Euro Maintains Buoyant Tone

The euro edged up to another all-time high versus the dollar in Asian trading, rising to 1.2986. Interim resistance begins at the psychologically key 1.30-level, followed by 1.3030 and 1.3065. Subsequent ceilings are seen at 1.31, backed by 1.3140 and 1.3180. Losses will target interim support at 1.2940, followed by 1.2925 and 1.29. Additional floors will emerge at 1.2880, backed by 1.2840 and 1.28.

Cable Steady at 4-mo High

The Sterling stood at its highest level since July against the dollar at 1.8573. Resistance is seen at 1.8580, followed by 1.86 and 1.8625. Subsequent ceilings are seen at 1.8660, followed by 1.87 and 1.8740. Support begins at 1.8530, followed by 1.85 and 1.8460. A move lower will target 1.84, backed by 1.8370 and 1.8340.

Dollar/Yen Mired Near Lows

Dollar/yen traded in a narrow range near its lows around 105.40. Support starts at 105, backed by 104.65 and 104.20. Additional floors are seen at 104, followed by 103.70 and 103.40. Resistance starts at 105.75, followed by 106 and 106.40. A move higher will target 106.80, followed by 107 and 107.35.

AUDUSD

The Aussie backed off a bit against the dollar in early Monday trade. Resistance is seen at 0.76 and 0.7645. Additional gains will target 0.7690, followed by 0.7750 and 0.78. Losses find support starting at 0.7530, followed by 0.75 and 0.7460. A move lower will target 0.7420, backed by 0.74 and 0.7370.

USDCHF

Dollar/Swiss remains mired at a multi-year low beneath the 1.18-mark, hovering near 1.1765. Losses will target 1.17, followed by 1.1640 and 1.1585. Additional floors are seen at 1.1530, followed by 1.1460 and 1.14. Resistance is seen at 1.18, followed by 1.1860 and 1.19. Subsequent ceilings are seen at 1.1950, backed by 1.20 and 1.2080.

As we head into this week’s much expected rate hike by the Federal Reserve, we doubt whether a quarter-point tightening to 2.0% in the fed funds rate would alter the deteriorating sentiment injuring the US currency. This notion is especially reinforced by the possibility that the Fed’s rate hike may be the last of the year. Although there stands a 50% chance of another rate hike in December, such a tightening would also be seen as the last of the Fed’s current tightening cycle as the combination of high oil prices and low US inflation spells slowdown.

Dollar bulls could well point to rising cash positions in US companies to be mobilized into higher business spending and even hiring especially now that election uncertainty has given way to 4 more years of fiscal stimulus. It can be agreed that Friday’s haughty October report was a reflection of a month’s data benefiting mostly from post- hurricane demand for construction jobs. Manufacturing jobs were down for the second straight month. The question is will we see a continuation of the sharp growth in services jobs.

SEE LATEST ARTICLES & IDEAS FOR MORE ANALYSIS ON JOBS, FED & THE DOLLAR.

The other key events from the US are Wednesday’s US deficit figures for September and US October retail sales on Thursday. Germany’s ZEW sentiment survey on Tuesday is expected to have slipped in November after a slight increase in October. A crucial event for the UK shall be Wednesday’s Bank of England quarterly inflation report, which shall determine the central bank’s inflation outlook in the medium-term and the long medium term (2-year horizon).

Speculators drive Euro net longs, other FX join in
Once again futures traders pushed up the Aussie, Euro and Swiss futures to record net long positions against the US dollar. Since the data on hand were for the week ending Nov2 , the rationale for the dollar damage was based on the emerging riskiness of holding dollar longs ahead of the escalating of election uncertainty. EUR net longs rose 17%, breaking a new all time high of 53,465 contracts while AUD edged up 2% to 28,990 net longs, also a record high. CHF net longs increased 16% to 31,792 contracts, attaining their highest in at least 7 years. JPY net longs rose 33% to 36,814 contracts attaining their highest level since February, while GBP net longs soared 40% to a fresh 3 month high of 13,342 contracts. CAD rose 9.6% to 39,692 contracts, highest in 3 weeks.


Will Jawboning avert $1.30

Aside from concerns with the US structural imbalances, we saw last week how German Chancellor Schroeder’s benign comments on the euro’s appreciation and ECB president Trichet concern with inflationary pressures were instrumental to the euro’s jump on Thursday and Friday. Should neither of the key Euro politicians (Schroeder, Eichel, Chirac, Sarkozy or Prodi) show any concern this week, we could easily see the euro shatter the $1.30 level and onto to 1.3030. More importantly, traders should also watch for comments from ECB officials (Trichet, Papademos, Issing, Weber or Noyer).
With eyes set on the $1.30 figure, euro resistance stands at $1.3030 and 1.3050.. Support lifts up to 1.2830-35, followed by 1.2790 and 1.2740-50.

Japan unlikely to intervene as long as its dollar problem

Apart from the usual remarks threatening to take action in the event of rapid currency moves, Japanese officials have done nothing else in stemming the yen’s appreciation. We think that as log as the yen’s rise is part of a dollar problem, Japanese officials are unexpected to intervene aggressively because such action would be eventually short-lived. Officials recognize that it would be fruitless to stem a move that is widely borne out of deteriorating dollar sentiment. But we expect the BoJ to do the following: 1) step up its intervenionist rhetoric once the ECB begins to show concern in order to gain more effect; 2) to launch operational intervention when the dollar decline is stabilized.

USDJPY tests the 105.60 support, which is 61.8% retracement of the rise from the April 1995 low of 79.97 to the August 1998 high of 147.62. A clear breach below it calls the 105.20 20 target. Any intervention is capped at the following targets of 106.00 and 106.30.

GBPUSD the enjoys free ride

Sterling traders shall watch whether the currency’s gains will be brought to a halt on Wednesday upon the release of the Bank of England quarterly inflation report. At its last report in August, the BoE said it expected inflation to drop “back in the near term and gradually increases thereafter in response to pressures on supply and moderating downward pressure from import prices, reaching the 2% target around two years ahead”. Most interesting will be the Bank’s interim inflation outlook. A benign outlook would imply no more rate hike for the year, thus keep sterling at a disadvantage relative to the euro.

Having broken the key 1.8510 resistance, cable sees pressure at $1.8570, followed by 1.86 and 1.8667. Support to start at the previous $1.8515—61.8% retracement of the $1.9140-1.7479 move, followed by $1.8420s. Target follows at 1.8375 and 1.8315—the 50% retracement of the said move.

Loonie knows no northern limit

As the loonie drags the greenback under the 1.2 level, traders delve deeper into territory unseen since 1992. The currency is also solid after the Friday’s Canadian jobs report showing employment up 34.3K last month from September’s 43.2K rise. The rate remained unchanged at 7.1%. Markets had expected a rise of about 29K. This was the second month straight in which the figure beat expectations.
Support seen at 1.19 and 1.1830. Upside starts at 1.2070 and 1.2150.

Aussie eyes 76.50

Aussie’s 2-centrise in one 3 days faces next resistance at 76.50, followed by 76.88 and 77.20, Support 75.50, followed by 75.33—the 61.8% retracement of the 80.02-67.73 decline. Key support stands at 75.