12/2/2004 5:00 pm: EUR/$..1.3264 $/JPY..103.23 GBP/$..1.9236 $/CHF..1.1516 AUD/$..0.7738 $/CAD..1.1943

Dollar Edges up on Oil and Ahead of Payrolls by Ashraf Laidi

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.

Advertisement

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.