The euro eased off its highs today after ECB policy makers and European government officials dominated the wires with their cautionary statements on the euro’s rise. Once the array of remarks managed to weigh on the euro, ECB president said the euro was not strong but the dollar that is weak. Yet this statement went unnoticed and kept the euro trading at around $1.3390-00.

Oil prices pushed back above the $43/ barrel when an attack on the US consulate in Jeddah, in Saudi Arabia propped the geopolitical risk back into the fore. Protests in Nigeria also shut down production on two oil platforms in the southern region oil region. Oil traders are weary of ahead of this Friday’s OPEC meeting, which may produce an increase in the average price band for the cartel’s basket of oil products from the official but long-established $22 per barrel to $28 per barrel. OPEC’s new target band could come in at a floor of $28-29 and a ceiling of at $35-$38.

EURUSD eases back on remarks

The euro eased back off its highs amid a chorus of cautionary remarks from ECB officials and European government officials. Most interestingly was a remark by ECB’s Trichet saying the euro was not strong but it is the dollar that is weak.

Eurozone finance ministers stepped up their concern with the euro’s excessive moves in their meeting today. ECB Chief Trichet said he told the ministers that both the US and the Eurozone had some homework to regarding the smoothing of FX movements. The mantra in the meeting has so far been urging for cooperation. Austrian Fin minister Grasser says he believes there’s an overshooting in the EURUSD rate and that Europe, Asia and Europe must all cooperate to stabilize the matter. Belgian Fin Min said there’s no need to talk about an ECB rate hike at the moment as oil prices have come back to more acceptable levels. He added that the strong euro helped limit the impact of high oil prices on Eurozone. ECB chief economist Otmar Issing said the rate of the EURUSD changes was brutal and unwelcome. Issing added the ECB will do everything to push inflation under 2.0% in the medium term

Tuesday’s ZEW survey from Germany is expected to show further deterioration in economic sentiment, but that would only engender a euro decline in the event that the currency has tapered off following rising signs of concerns. The ZEW research institute’s economic sentiment index expected to deteriorate to 10.0 in December from 13.9, which would be a new low

Support seen stabilizing at $1.3370 and $1.3330. Key foundation seen held at 1.3250. Upside capped at 1.350, 1.3530 and 1.3355-60.

USDJPY regains 103, EURJPY at 9-month high

The yen fell across the board, falling towards the 103 yen level against the dollar and breaking below the 9-month low against the euro of 138.25 yen. Upside capped at 103.60-70, followed by 103.90, the 38% retracement of the 107.27-101.82 drop. Key resistance stands at 104.50—the 50% retracement of the said move. Support stands at 102.60, followed by 102.30 and 101.80. Key foundation held at 101.28 low of December 2000, which had not been attained since 1995.

Sterling tempered by data, comments

Sterling was little impacted by the unexpected 0.5% decline in October manufacturing production, which undershot forecasts for a 0.4% rise. But the main reason to sterling’s retreat were comments from European officials weighing on the single currency. This allowed very little choice for sterling other than to retreat lower.

Support begins at $1.9370, followed by $1.9340. Additional floors seen emerging at $1.93, followed by 1.9280 and 1.9245. Cable sees pressure at $1.9440, followed by 1.9470 and 1.95. Further gains will target 1.9525.

USDCAD edges above 1.20, awaiting BoC

The US dollar rose against the loonie for the third straight day amid on a combination of general dollar buying and uncertainty with Tuesday’s Bank of Canada interest rate decision. While markets consensus is split over the outcome, we see the central bank leaving rates unchanged at 2.5% due to the weak employment report and GDP figures. Moreover, with the lonnie’s 7.5% rise year to date, we think the central bank will take a wait and see attitude rather than risk a tightening that will engender further appreciation in the currency.

USDCAD resistance starst at 1.2030, followed by key pressure at capped at the 1.2065-70 high of November 19. Subsequent pressure seen at 1.2100. Support held at 1.19, 1.1850 and 1.1750.

At 10:00 AM Canada November Ivey PMI (exp 60.0, prev 56.6)

The greenback remains on weak footing against the majors as a result of Friday’s unexpectedly poor US labor report. The economic calendar for the coming week remains light, with the exception of central bank meetings from the Bank of England, the Reserve Bank of Australia and the Bank of Canada, of which none are expected to change policy.

EURUSD Buoyed Above 1.34

ECB board member Weber acknowledged that increasing growth differential between the economies of the US and the Eurozone, saying the faster US growth rate will positively impact foreign exchange. Furthermore, he added that flexibility in Asian foreign exchange rate policy would be helpful. Weber reiterated recent comments from Eurozone officials, saying that movements in fx rates can hurt competitiveness in the short-term.

EURUSD traded narrowly between 1.3420 and 1.3460. Resistance is seen at 1.3480, followed by 1.35 and 1.3530. Additional ceilings are eyed at 1.3565 and 1.36. Support begins at 1.3420, backed by 1.34 and 1.3370. Subsequent floors are seen at 1.3340, backed by 1.33 and 1.3270.

Cable Mired in Range Near Highs

Cable briefly dipped beneath the 1.94-level in early London trading following the release of UK manufacturing and industrial production data, which was weaker than expected. Manufacturing production in October fell 0.1% m/m and 0.5% y/y, undershooting forecasts for a rise of 0.5% m/m. Industrial production also fell short of economists’ expectations, dropping 0.1% m/m, instead of calls for a 0.5% rise.

Cable recovered above the 1.94-level, with resistance eyed at 1.9440, followed by 1.9470 and 1.95. Further gains will target 1.9525, followed by 1.9550 and 1.9590. Support begins at 1.94, followed by 1.9370 and 1.9340. Additional floors will emerge at 1.93, followed by 1.9280 and 1.9245.

Dollar/Yen

Japan’s Chief Cabinet Secretary Hosoda reiterated that current dollar/yen rate does not reflect economic fundamentals and would continue to closely monitor forex moves before deciding on action. He also added that Japan was not considering a sell-off of US treasuries. The MoF’s Hosokawa echoed similar remarks, saying Japan was not considering dumping dollar denominated assets.

USDJPY hovers near 102.30, with resistance eyed at 102.50, backed by 102.80 and 103. Subsequent ceilings are seen at 103.40, backed by 103.70 and 107. Losses will target support at 102, followed by 101.70 and 101.40. A break lower encounters subsequent support at 101, backed by 100.65 and 100.20.

Aussie Stalls Near Prev High

The Australian dollar edged up near last week’s highs earlier in the session at 0.7820, but maintained its slightly corrective tone versus the greenback. A clear indication of the pair’s lack of steam was Friday’s minor gains relative to the lofty gains amassed by the euro and sterling. While the longer-term outlook on the Australian dollar remains unchanged – with a bullish outlook and a target of 0.80 further on the horizon, a near-term correction may be in effect taking the pair towards 0.7670 prior to extending on its next leg up.

The RBA is scheduled to meet this week, but no change in monetary policy is expected – with the Bank expected to leave its benchmark rate steady at 5.25%. Also slated this week will be Australian consumer sentiment, labor report, and trade balance data.

FX rates in early Monday Pacific trade showed further dollar losses against the major currencies with EURUUSD rates as high as 1.3480 and USCHF below 1.1300 following Friday’s disappointingly low non-farm payroll report from the US in November. The damage to the dollar was especially severe as it spoiled the dollar’s fragile attempts to recover on Thursday. The labor report propelled the EURUSD by 2 cents to a fresh all time high of $1.3460, while knocking 1.5 yen from the dollar to 102.04. Sterling gained 2 cents to $1.9428, 10 pips short of Thursday’s 12-year high. Although the weak labor report does not alter the 100% probability of a 25-bp Fed rate next week, the dollar remains largely pressured on structural arguments such as the twin deficits and concerns of the durability of foreign inflows into the US.

Since there will be a relative dearth of economic data/events this week, we expect currency markets to place much attention on comments from policymakers and politicians regarding the latest surge in negative dollar momentum. This is especially as the case as EURUSD nears the $1.35 level, which is the equivalent to the 1.45 low in the USD/Deutsche mark attained in summer 1995.

Tuesday’s interest rate decision by the Bank of Canada will be a close call, yet we expect no change manly due to the weak GDP report and employment figures show last week. Also on tap on Tuesday, is Germany’s ZEW research institute’s economic sentiment index expected to deteriorate to 10.0 in December from 13.9, which would be a new low. We also expect the Reserve Bank of Australia to keep rates unchanged at 5.25% when it meets this week.

Speculators Ease Back on Dollar Selling

Speculators trimmed their net US dollar shorts against the euro, sterling and loonie last week, while further shorting the greenback against the Aussie, yen, and swissie. EUR net longs fell for the third consecutive week, down 24% to 24, 485 contracts, compared to the all time high of 53, 465 contracts attained 5 weeks ago. Sterling net longs slipped 2% to 32,775 contracts from the prior week’s 5-year high. CAD net longs posted their 4th consecutive weekly decline, falling 20% to 23,631 contracts. On the dollar-selling side, yen net longs 19% to 39,360 contracts, after a drop in the prior week interrupted a 4-week consecutive increase. Aussie and Aussie net longs edged up 1% and 0.4% to 30,974 and 38,938 contracts respectively.

EURUSD nears $1.35 as ECB is awaited

As the euro hovers around just below the $1.35 level, deemed the equivalent of the 1.4478 low in USD/DEM attained in Summer 1995, there is rising speculation of a possible intervention by the European Central Bank. This could take the form of more aggressive jawboning of which we think the ECB is perfectly capable.
Lucas Papademos, ECB vice told Japan’s Nihon Keizai Shimbun in a recent interview (just published today) that the recent drop in the dollar against the euro is unwelcome and despite the considerable strengthening of th euro, the Eurozone’s has managed to withstand the move due to its industrial competitiveness.

Tuesday’s ZEW survey from Germany is expected to show further deterioration in economic sentiment, (fall to 10 from 39.9) which we think could accelerate any euro declines in the event that the currency has tapered off following any jawboning prior to the figure’s release at 5.00 am NYT on Tuesday. The last ZEW figure tumbled by 17.4 points to 13.9 in November, exceeding analysts' expectations for a much more modest fall to 29.5. The ZEW Institute’s economist said they: “…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”. Note that Germany’s IFO business climate index dropped significantly in November (to 94.1 from 95.3) after remaining generally unchanged in the preceding three months. In addition to Germany’s structural problems, the sluggishness was blamed to high oil prices.

Failure of the ECB to intervene verbally or operationally by Monday trade could extend the pair to $1.3495-00, before derivatives stops pressure it back towards the $1.3430s. Support could extend $1.3370 and 1.3300. Upside capped at 1.350, 1.3530 and 1.3355-60.

USDJPY tests 102

The yen’s relative weakening against the euro highlighted through the currency’s 11-day tumble is helping to ease Japan’s concerns with the yen’s appreciation’s against the dollar. There are a few Japanese releases due this week, expected to show a weakening in the leading economic index, a drop in machine orders and consumer confidence.
Support stands at 101.80, followed by the 101.28 low of December 2000, which had not been attained since 1995. Upside capped at 102.45-50, followed by 103.30 and 103.55-60. Only intervention-driven buying could sustain the pair towards 104.30.

Sterling could be fuelled by manufacturing data

We warned in last Sunday’s Preview that “traders will watch two speeches from Bank of England Governor Mervyn King”, Indeed, on Tuesday, Kind did propel GBPUSD to 12 year highs when he focused on the potential advantages of sterling’s decline against the euro on the trade deficit, thus ignoring the impact of sterling’s rise versus the dollar, which was seen as an implicit green light to further push up sterling against the dollar.

Traders could see fresh gains in GBPUSD on Monday’s manufacturing production and industrial production releases expected to show a 0.3% rise in October from 0.1% and a 0.4% increase from a 0.4% drop respectively. The figure would help stabilize concerns of sluggishness in Britain’s oft struggling manufacturing sector. Yet, should the euro momentum overcome sterling’s rally--more recently a result of BoE Governor King’s comments last week—cable’s fortunes may become more limited.

A strong manufacturing figure could prop sterling $1.9460, after which it could lead to $1.9790-95. We see support starting at $1.93, followed by $1.9230 and $1.91-- the 38% retracement of the $1.8523-1.9438 move. Key foundation stands at the previous high of $1.9035-40.

CAD turns to Bank of Canada

The loonie shrugged Friday’s weak US labor report thanks largely to a lukewarm Canadian employment report which showed a tepid 4.6K rise in November jobs, following a 34.3k increase. Economists had expected a rise of as much as 30K. The unemployment rate stood unchanged at 7.1%. The report reduces the likelihood of the bank of Canada raising interest rates next week, which could generate fresh interests in USDCAD towards1.2050.

USDCAD sees resistance 1.2030, followed by key pressure at capped at the 1.2065-70 high of November 19. Subsequent pressure seen at 1.2100. Support held at 1.19, 1.1850 and 1.1750.

Aussie seen targeting 78.75, awaits RBA

The lack of any interventionist rhetoric should help Aussie regain the 78.75-80 cent even as the RBA is expected to leave rates unchanged this week. The currency posted its largest 3-day drop in 5 months on disappointing Q3 GDP growth report showing a 0.3% rise from 3.0% in Q2. Renewed bearishness against in the greenback could propel the Aussie to the 80 cent level.

Aussie resistance seen starting at 78.25-30, followed by 78.70. Key resistance seen held at 79.20. Support starts at 76.70, followed by 76 and 75.50—the 38% retracement of the 69.50-79.44 high.

Fresh damage ensued in the dollar today after US jobs grew by a disappointing 112K in November, following a revised 303K increase in October. The tepid job growth was the lowest since July, thus throwing cold on last month’s strong labor report. The unemployment rate fell back to 5.4% from 5.5%, while average hourly earnings rose 0.1% from a revised 0.3%. An aggregate of 54,000 jobs was revised down in September and October.


For more details on the Jobs report, the dollar and the Fed, please see latest articles and ideas on Forexnews.com

The blow to the dollar was especially severe as it damaged the currency’s fragile attempt to recover yesterday. The labor report propelled the EURUSD by 2 cents to a fresh all time high of $1.3460, while knocking 1.5 yen from the dollar to 102.04. Sterling gained 2 cents to $1.9428, 10 pips short of Thursday’s 12-year high.

The dollar's slump was also highlighted by is its inability to rally in the face of Four explosions in Madrid, Spain, which were reported to be the work of Basque separatist group ETA. None of the explosions resulted into reported casualties. The rationale of the euro’s failure to sell-off was attributed to the fact that the bombing was not carried out by Al Qaeda, a group which has been seen by many as the main cause of geopolitically threatening news that are eventually dollar negative.

A stronger than expected services ISM survey at 61.3 in November, following a 59.0 reading was hardly noticed in the midst of the payrolls-dollar storm. The emloyment index slipped to 55.0 from 55.8, while the new orders index fell to 59.9 from 60.5.
Oil prices continued their decline, as WTI oil futures shed full dollar to $42.02, reaching their lowest level since August 31. The decline continues to be a combination of relatively warm temperatures and OPEC’s willingness to raise production as signaled by Saudi Arabia, the cartel’s leading producer. The larger than expected build up in US heating oil inventories was the initial catalyst to the move. But it will be interesting as to whether OPEC will agree on a supply hike at its meeting on Friday.

Fed & Treasuries

The 10-year lost about 15 bps to 4.26% following the disappointing labor report, while the yield on the 2-year dropped 8 bps to 2.92%. Today’s jobs report does not alter the expectation of a 25-bp Fed hike for this month. Although the Fed’s favorite inflation measure of PCE core price index remained stable at 1.5% in the year ending in October--below the implied target of 2.0%-- the Federal is watchful of the potentially inflationary impact of falling oil prices. Since a continued decline in oil prices is expected to ease restraint on corporate and consumer spending, we believe the Fed’s tightening to be well warranted ahead of a backup in aggregate demand. The situation is cogently highlighted by this year’s developments when oil prices more than doubled over the past 6 months, while the 10-year bond yield fell 18% over the same period. Thus, as rising oil’s contractionary impact on the economy being gradually removed, the Fed can continue to remove its policy accommodation. Accordingly, we see the fed funds rate topping at 3.00% by end of 2005.

EURUSD soars 2 cents to $1.3460

With the euro nearing the key $1.35 level, deemed as the 1.4478 low in USD/DEM attained in Summer 1995, there is rising speculation of a possible intervention by the European Central Bank. This could take the form of more aggressive jawboning next week, of which we think the ECB is perfectly capable. Tuesday’s ZEW survey from Germany is expected to show further deterioration in economic sentiment, but that would only engender a euro decline in the event that the currency has tapered off following rising signs of concerns.

Failure from the ECB to intervene verbally or operationally by Monday trade could extend the pair to $1.3495-00, before derivatives stops pressure it back towards the $1.3430s. Support could extend $1.3370 and 1.3300. Upside capped at 1.350, 1.3530 and 1.3355-60.

USDJPY tests 102

Despite the yen’s 11-day decline in the yen against the euro, the Japanese currency has dragged the dollar towards the key 102 level, with little warning from Japanese authorities. Support stands at 101.80, followed by the 101.28 low of December 2000, which had not been attained since 1995. Upside capped at 102.45-50, followed by 103.30 and 103.55-60. Only intervention-driven buying could sustain the pair towards 104.30.

Sterling regains $1.94

Sterling pared all but 10 pips of Thursday’s 2.3 cent drop, but failed to hit a fresh 12 year high as EURGBP regained the 69.20 pence level. Should the euro momentum overcome sterling’s rally--more recently a result of BoE Governor Kong—cable’s fortunes may become more limited.

We see support starting at $1.93, followed by $1.9230 and $1.91-- the 38% retracement of the $1.8523-1.9438 move. Key foundation stands at the previous high of $1.9035-40. Resistance stands at $1.94, followed by 1.9430 and 1.9460.

CAD unconvinced by Canadian jobs

The loonie shrugged the weak US labor report mainly thanks to a lukewarm 4.6K rise in November jobs, following a 34.3k increase. Economists had expected a rise of as much as 30K. The unemployment rate stood unchanged at 7.1%. The report reduces the likelihood of the bank of Canada raising interest rates next week, which could generate fresh interests in USDCAD towards1.2050.

USDCAD sees resistance 1.2030, followed by key pressure at capped at the 1.2065-70 high of November 19. Subsequent pressure seen at 1.2100. Support held at 1.19, 1.1850 and 1.1750.

At 7:00 AM Canada November Unemployment Rate (exp 7.1%, prev 7.1%) Canada November Change in Employment (exp 30.0k, prev 34.3k) At 8:30 AM US November Unemployment Rate (exp 5.4%, prev 5.5%) US November Non-farm Payrolls (exp 200k, prev 337k) At 9:30 AM US Philadelphia Fed’s Santomero Speaks (exp n/a, prev n/a) At 10:00 AM US November Services ISM (exp 59.0, prev 59.8)

Currency traders took to the sidelines overnight with markets holding off until the release of the US November labor report, scheduled for 8:30 AM EDT. The dollar maintained its buoyant tone against the majors, as the currency continued to recover from its steep sell-off of recent weeks. The euro failed to overcome the 1.33-level, while the dollar/yen pair remained supported above the103-mark.

In the coming session, Forexnews expects non-farm payrolls to rise by as much as 290K-300K, well above the consensus forecast of 190-200K, while we see the unemployment rate slipping to 5.4% from 5.5%. We expect the NFP reading to be led by another month of strong employment creation in the services sector of about 275-85K, and net positive creation of jobs in manufacturing from a loss of 5K in the prior month. We see construction jobs to reverse some of the strong 75K in October, which largely emerged as a result of post-Hurricane rebuilding in the Southeast. The tepid showing of weekly jobless claims also suggests that layoffs have neared a trough as the 4-week average of weekly drifts at 4-year lows.

Cable Steady Near 1.92

Cable traded within a narrow range, briefly dipping beneath the 1.92-level overnight. UK Chancellor Gordon Brown said that forex imbalances between the euro and the dollar are contributing to an uncertain global economic outlook. Furthermore, he feels there is still a great deal of uncertainty in the global outlook. However, he was optimistic about the UK’s growth prospects for the coming year.

Separately, UK’s CIPS/Reuters services PMI edged up to 56.7 in November, up from 56.3 a month earlier, its highest reading since August. The new business index improved to 56.8, from 56.4, while the employment index improved to its best level since March 2001 at 53.8, from 52.6.

Cable holds steady above the 1.92-mark, with resistance seen at 1.9245, backed by 1.9280 and 1.93. Subsequent ceilings are eyed at 1.9340, followed by 1.9370 and 1.94. Meanwhile, support beneath the 1.92-handle starts at 1.9175, followed by 1.9130 and 1.91. A move lower will target 1.9065, backed by 1.9040 and 1.90.

EURUSD Stalls at 1.33

Eurozone November services PMI dropped to 52.6 in November, it’s lowest reading since August 2003, and down from 53.5 in October. The employment index drifted lower to 50.5, down marginally from the previous month at 50.9. The expectations component slid to 61.4, down from 62.2, posting its lowest reading since March 2003. Separately, Eurozone retail sales edged up 0.7% m/m, but slipped 0.2% y/y.

The euro remains mired beneath the 1.33-level, with support starting at 1.3270, followed by 1.3230 and 1.32. Subsequent floors are seen at 1.3170, backed by 1.3140 and 1.31. A move past 1.33 will target 1.3340, followed by 1.3370 and 1.34. Subsequent resistance is eyed at 1.3440, followed by 1.35 and 1.3530.

USDJPY Buoyed Above 103

Japanese government officials continued their attempts to jawbone the yen lower, reiterating their ongoing vigilance against rapid forex moves and their readiness to act against volatility. Meanwhile, the BoJ’s Mizuno discussed monetary policy, saying its purpose was being fulfilled. He sees risk that asset prices to turn volatile when credit tightens, and that the Bank should maintain its current framework until set conditions are met. Mizuno also said it was not possible for the BoJ to have both quantitative easing and interest rate policy.

Earlier data showed Japan’s capex up 14.4% y/y, with firm’s reporting Q3 recurring profits up 37.8% y/y. Sales for the same period were up 5.7% y/y.

Resistance is seen at 103.50 followed by 103.80 and 104. Additional resistance is seen at 104.20, followed by 104.70 and 105. Support starts at 102.65, followed by 102.20 and 102. Subsequent floors are seen at 101.70, followed by 101.40 and 101.

AUDUSD

Resistance is seen at 0.78, followed by 0.7850 and 0.79. Additional ceilings are seen at 0.7940, followed by 0.7970 and 0.80. Losses will target support at 0.77 and 0.7660. Subsequent floors are seen at 0.7620 and 0.76.

The dollar ended well off its lows of the day amid unwinding of shorts ahead of tomorrow’s November labor report from the US, which traders are expecting top produce another strong performance (more on this below). After hitting a fresh all time lows against the euro and 5-year highs against the yen in early European trade, the dollar pushed higher during the remainder of the Euro session, only to be briefly interrupted by a larger than expected 25K rise in weekly jobless claims. But the dollar’s shorts were further unwound after US factory orders grew 0.5% last month beating estimates of a 0.2% rise, following a flat reading in the prior month. October durable orders were revised to a 1.1% decline from a previously reported 0.4% decline.

Oil prices lost another $2.00 reaching $43.30s per barrel as speculators added to yesterday’s sell-off, which resulted from a larger than expected build up in US heating oil inventories. Oil Stocks rose 2.3 million barrels last week, defying expectations of a 1.4 million barrel rise. Saudi Arabia’s willingness to raise daily production to as much as 12 million barrels has also helped stabilize the situation.

The 10-year Treasury note hit a fresh 3-month high at 4.39% on a combination of increased talk that the Fed may be growing less sanguine with inflation. Wall Street Journal reporter and prominent Fed watcher Greg Ip’s article cited that “A growing number of Federal Reserve officials believe inflation risks are on the rise -- a shift in sentiment that will likely keep the central bank raising interest rates at its next few meetings”. We also believe that a continued decline in oil prices would boost the economy by easing the restraint on corporate and consumer spending, thereby allowing the Fed to extend its tightening process.

Another Upward Surprise in Non-farm Payrolls

We expect non-farm payrolls to rise by as much as 290K-300K, well above the consensus forecast of 190-200K, while we see the unemployment rate slipping to 5.4% from 5.5%. We expect the NFP reading to be led by another month of strong employment creation in the services sector of about 275-85K, and net positive creation of jobs in manufacturing from a loss of 5K in the prior month. We see construction jobs to reverse some of the strong 75K in October, which largely emerged as a result of post-Hurricane rebuilding in the Southeast. The tepid showing of weekly jobless claims also suggests that layoffs have neared a trough as the 4-week average of weekly drifts at 4-year lows.

Likely Dollar Impact

Unlike last month when the explosive rise in October payrolls to 338K failed to help the dollar, we expect more dollar response from a strong figure tomorrow. A reading of at least 235-50K would be evoke a positive reaction in the dollar, while a reading along our forecast of 290-300K could drag the euro down to $1.3170-80 and lift USDJPY to as high as 104. We justify such a reaction from the recent slight up-turn in dollar momentum as speculators take profits off the table, as well as the oil drop.

Indeed, EUR net longs last week dropped 40% to 32,261 contracts, posting the second consecutive weekly decline, while Aussie net longs fell to 30,629 contracts. CHF net longs broke a 4-week consecutive rise slipping 5% to 38,786 contracts after hitting a 5-year high the prior week. JPY net longs fell 26% to 33,198 contracts, backing off from their 13 month high. CAD net longs fell for the third straight week, down 12% to 29,471contracts.

Euro Drops Ahead of NFP as Trichet Remains Restrained

The euro pushed lower after the ECB president JC Trichet confirmed that the Bank has cut its forecasts for 2004 and 2005 Eurozone growth, while raising its forecast for 2005 inflation. Trichet said the central bank expects 2004 growth at 1.8% from a previously forecasted 1.9% growth, and 2005 growth at 1.9 % from a previously forecasted 2.3%. The ECB confirmed raising its 2005 inflation forecast to 2.0% from 1.8 %, with 2004 inflation projection left unchanged at 2.2%.

On the subject of intervention, Trichet stuck to the script of not commenting on intervention publicly, seeking to dampen yesterday’s comments from the Japan Vice Fin Min Watanabe indicating possible coordinated intervention between Europe and Japan. We stress that Trichet’s reluctance to comment on intervention does not reduce the possibility of intervention and only reflects the central banker’s cautious rhetorical approach.

Despite Trichet’s relative silence of matters of intervention, his comments sounded less hawkish than at the November 4 conference, when he said “inflation to remain significantly above 2% in coming months” blaming oil prices as having a “direct impact on inflation”. Today, Trichet said there were “no indications of underlying inflation picking up”. Such change of tone may have been intended at stabilizing the currency rise as it nears the $1.35 level, which is equivalent to the DEM 1.4487 low in the USD/Deutsche mark rate attained in summer 1995 (rounded off to DEM 1.45 in the USD/DEM rate).

We see EURUSD support extending to 1.3230 followed by 1.3170-80 at which stability could emerge. A figure less then 140-50K should prop the euro back to the $1.3325-30, with accumulated gains to face pressure at 1.3370-75.

Japan Sticks to Concerned Tone

One day after Japan hinted at a possible "harmonized action" with Europe to stem speedy dollar declines, officials maintained that both Japan and Europe shared concerns with the recent dollar moves. We do not rule out dollar buying by Japanese authorities ahead of tomorrow’s non-farm payrolls.

USDJPY upside seen initially capped at 103.65-70, with increased buying capped at 104. Only BoJ-driven buying along with a +275K NFP could lead to 104.30. Support stands at 102.60, followed by 102.45-50, a break of which could trigger downside all the way top 101.80. Subsequent target stands at the 101.30 low of Dec 2000, which raises chances of an intervention by the Bank of Japan.

Sterling Vulnerable to Intra-day Correction

Shrugging a haughty 2005 GDP forecast of 3.0-3.5% by Chancellor Gordon Brown, sterling joined the retrenchment in the major currencies against the dollar on a combination of partial liquidation of dollar shorts and cautiousness ahead of tomorrow’s NFP report.
A NFP report of at least 275K could drag GBPUSD to initial support at $1.91 and towards the 38% retracement of the $1.8523-1.9438 move. Key foundation stands at the previous high of $1.9035-40. Resistance stands at $1.9330, followed by $1.9360. Toppishness stands at $1.94.

CAD Turns to Canadian Jobs Report

USDCAD rose to a 1-week high at 1.1550 on a combination of a general bounce in the greenback and a $5 accumulate sell-of in oil, which is a negative for Canada’s oil receipts. Canada’s finance minister Ralph Goodale reiterated his concern over the impact of the strengthening CAD but deemed it as a reception of the nation’s improved productivity.
Aside from tomorrow’s key US job report, CAD traders await Canada’s November employment figure expected to show a 30K rise from 34.3K reading in October. The unemployment rate is seen unchanged at 7.1%.
We see upside capped at 1.1590-95, followed by 1.1630. Support seen at 1.1475 and 1.14.