Very little transpired in the currency markets today as the dollar held on to Wednesday’s gains. As the Federal Reserve sets to raise the fed funds rate by 25 bps next week, it would lift US rates above their Eurozone counterparts for the first time since March 2001. Another particularly dollar positive aspect of next week’s FOMC meeting is the overwhelming expectation that tightening will take place in subsequent meetings as well as next week’s. The 20% slide in the oil prices of the past 6-months is also seen as a dollar positive since it removes the strain on US consumers and businesses. Nonetheless, the US Energy Department said in a report today that expected higher energy prices ahead.

Oil prices treaded above $42 per barrel, ahead of 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.

Today’s reopening of the 9-year&11 month US Treasury note of $9bn drew a disappointing 10%from indirect bidders, who are largely presented by foreign central banks. This paled in contrast to the 66% at Wednesday’s 5-year auction. Treasuries fell as the yield on the 10-year note rose to 4.17% from 4.10%.
US weekly jobless claims rose 8K to 357K following a 20K rise in the prior week, while 4-week avg rose 4.75K to 340K.

Aside from the OPEC meeting, markets turn to tomorrow’s US PPI figure expected at a benign 0.2% in the headline and core rate in November, following a 1.7% and 0.3% rise. The figure could ease inflation worries, but will not change the outlook of further rate hikes ahead.

Also of interest, is the US November budget balance expected to have deteriorated to $54 billion from $43 billion, which could highlight the fiscal imbalance, which has been amid the core points of the dollar damage.

Euro adrift

There were no significant developments in the euro rhetoric charade except from remarks by Italy's prime minister Silvio Berlusconi indicating he will raise the issue of the EURUSD when he meets US president Bush next week. Berlusconi said: "The 15th I will see Bush, and one of the issues that I will put on the table is the monetary policy of the US on the dollar". As peculiar as Berlusconi’s remarks may sound, the Fed’s monetary policy may start to help the dollar.

Drifting just above $1.33, euro seen potentially targetting $1.3250, followed by 1.3230 and 1.3150—the 50% retracement of the $1.2850-1.3468 rise. Upside capped at $1.3370 and $1.3430.

USDJPY limits gains

USDJPY extended gains towards the 105 level, helped by yesterday’s rise move and the latest remarks from Japan’s PM denouncing the dollar’s rapid fall. We see the dollar having enough luster ahead of tomorrow’s Fed to extend gains towards 105.60, the 38% retracement of the slide from the October high of 111.70 to the latest low of 101.82. We see renewed bearishness to build up near 106, luring speculators for a renewed attack on the 102 figure into year’s end. Downside starts at 103, followed by 102.75. Key support follows at 102. Preliminary support stands at 101.80, followed by Key foundation at 101.28 low of December 2000, which had not been attained since 1995.

Sterling stabilize atop $1.9250

There was no surprise in the Bank of England’s decision to keep interest rates unchanged today, and we do think that the next rate move could be down than up. Nonetheless, sterling’s 3% declines against the euro so far this year is providing the economy with some breathing room.

UK trade deficit rose to £5.3 billion in October from September’s £4.5 billion, worse than the expected 4.8 billion. We stick to our point that sterling’s slide against the euro is increasingly suspected to be a forerunner of a drop in cable.
Sterling support stands at 1.9245 and 1.9170. Upside sees pressure at $1.9340, followed by 1.94 and 1.9450.

The dollar staged a broad rally in early Wednesday Asian trade gaining 2.5 cents against the euro and 3 yen against the Japanese currency, before later paring nearly ½ of those gains. A combination of pre Fed meeting profit-taking and fresh declines in oil prices encouraged traders to unwind short dollar positions. Oil prices’ 20% retreat to a 6-month low of $41.48 per barrel has also helped trigger the dollar’s jump, especially that the currency had hardly showed any reaction in past oil bounces. Yesterday’s decisions by the Bank of Canada and Reserve Bank of Australia to not raise interest rates were of no surprise, but definitely highlighted the central banks’ growing concern with the appreciation in their currencies and bring up the topic of the dollar’s tumble to the fore.

Strongest foreign participation in Treasury Auction

In another dose of positive dollar news, today's 5-year Treasury note auction of $15 billion drew a record high 65% participation by indirect bidders, which are usually a proxy of foreign central bank participation. This is not only higher than the 44% seen in last month's 5-year auction, but the highest foreign participation since the data have been made available in summer 2003. The auction is supportive for the US dollar as it stabilizes emerging fears that foreign central banks are tempering their demand for US treasuries. The news pushed the 10-year note yield to a 3-week low of 4.12%.

Next week’s expected rate hike from the Fed is also dissuading traders to hold on to some of their dollar shorts. The 25-bp rate hike to 2.25% in the fed funds rate would lift US rates above their Eurozone counterparts for the first time since March 2001. Another particularly dollar positive aspect of next week’s FOMC meeting is the overwhelming expectation that tightening will take place in subsequent meetings as well as next week’s.

Euro retraces ½ of the slide

The 1.8% drop in the euro was followed by a 50% rebound towards the 1.3330s. We expect the pair to consolidate around the $1.3270-1.3430 range into the end of the week as traders remain cautious ahead of the week’s remaining data and next week’s FOMC meeting. Friday’s PPI and the University of Michigan sentiment from the US will shed important light on inflation and consumers.

Drifting near the $1.3350s, Support starts at $1.3250, followed by 1.3230 and 1.3150—the 50% retracement of the $1.2850-1.3468 rise. Upside capped at $1.3370 and $1.3430.

USDJPY limits gains

USDJPY staged a sharp 3 yen rise on the heels of an expectedly weak GDP figures from Japan and general dollar buying following the Reserve bank of Australia decision to hold rates steady. Q3 GDP was rose a mere 0.1% under new calculation methods, following a 0.1% contraction of in Q2. Preliminary Q3 GDP figures released last month had shown growth up 0.1%. But the report had some positives such as the 1.1% rise in capex.
Any dollar rebound is seen capped near 105.60, the 38% retracement of the slide from the October high of 111.70 to the latest low of 101.82. We see renewed bearishness to build up near 106, luring speculators for a renewed attack on the 102 figure into year’s end. Downside starts at 103, followed by 102.75. Key support follows at 102. Preliminary support stands at 101.80, followed by Key foundation at 101.28 low of December 2000, which had not been attained since 1995.

Sterling averts sharp sell-off

Sterling may have partially recovered from a 2.5-cent slide but traders’ awareness of sterling’s dubious fundamentals remains at the fore. Thus, sterling’s slide against the euro is increasingly suspected to be a forerunner of a drop in cable. Tomorrow’s Bank of England decision on interest rates is expected to produce no change. Aside from the euro serving as the main catalyst to cable’s upside, we see more downside room in the short term.

Sterling support stands at $1.9340, followed by $1.93 and 1.9245. Upside sees pressure at $1.9440, followed by 1.9470 and 1.95. Further gains will target 1.9525.

USDCAD retraces 50% of last 3 months

The loonie extended its damage against the US dollar, amounting to nearly a 3.5-cent jump to 1.2345—the highest USD figure since Oct 28, before retreating nearly 2 cents off its highs. The central bank decision to hold rates steady combined with the RBA’s decision to do the same underline soma nations’ concern with the mounting values of their currencies. We expect the central Bank to keep rates unchanged next month in the event that USDCAD drops back below 1.19 and oil remains under $45 per barrel.

USDCAD resistance stands at 1.2270, followed by 1.2330 and 1.2380—the 50% retracement of the 1.3052-1.1715. drop. Support starts at 1.2130, followed by key support at 1.2070. Key foundation stands at 1.1975.

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.

No Key Data

The greenback extended its recovery against the majors in early Wednesday trading, pushing the euro down to 1.3293 and sending the sterling to 1.9263. The sharp dollar recovery coincided with further selling of spot gold in the overnight session, dropping beneath the key $450/oz level to $444.75.

The dollar’s strength came in spite of resurfacing rumors of China’s revaluation of the yuan, which would likely trigger further selling of the greenback. An influential government economist, Ba Shusong said that ‘conditions were ripening for reform to the exchange rate mechanism’. He added that hot money flowing into China was restrained to a certain extent since the Fed started its tightening cycle. Lastly, he said that domestic demand would be the driving force for China’s economy once foreign trade becomes more balanced.

AUD Breaks Key Support

The Australian dollar tumbled sharply overnight against the greenback, falling through key support near the 0.77-cent level, which marked a three-month ascending trendline. The Aussie’s sell-off finally let up near 0.7585 – the 50% retracement of the latest leg up from 0.72 to 0.7944. Some traders attributed the aggressive selling to sentiment that the RBA’s next move would come in the form of a rate cut given recent sluggish growth data. Meanwhile, the RBA, as expected left rates unchanged when it announced its monetary policy decision earlier in the session.

AUDUSD hangs onto the 0.76-level, with support starting at 0.7585, the aforementioned fibonacci retracement, followed by 0.7530 and 0.75. Additional losses will target 0.7450, followed by 0.7420 and 0.74. Resistance is eyed at 0.7640, backed by 0.7670 and 0.78. Subsequent ceilings are seen at 0.7840-50, backed by 0.7880 and 0.79.

Euro Plunges

The euro dropped by over 1% against the dollar beneath the 1.33-mark overnight amid broad based dollar buying. Support begins at 1.33, followed by 1.3270 and 1.3230. Additional resistance is seen at 1.32, followed by 1.3165 and 1.3120. Gains will target resistance at 1.3340, followed by 1.34 and 1.3430. Further resistance is seen at 1.3480, followed by 1.35 and 1.3530.

Dollar/yen Climbs Shy of 104

Japan’s Q3 GDP was revised to 0.1% q/q, shy of the 0.2% economists had forecasted. Private-sector consumption was revised up to 0.2% q/q, while capex was revised up to 1.1 % q/q.

Support is seen at 103.70, backed by 103.35 – the multi-year low and 103. A move lower will target 102.65, followed by 102.20 and 102. Resistance is seen at 10420, followed by 104.70 and 105. Subsequent ceilings are eyed at 105.50, followed by 106 and 106.40.

Cable Plummets

The sterling slumped against the dollar, tumbling beneath the 1.93-level overnight. The pair has since clawed its way back above 1.93 and faces resistance at 1.9330 and 1.9370. Subsequent ceilings are seen at 1.94, followed by 1.9440 and 1.95. Losses will find interim support at 1.93, followed by 1.9280 and 1.9240. Additional floors will emerge at 1.92, followed by 1.9175 and 1.9130.

Continued jawboning from European officials did not stop the euro from scraping new highs against the dollar at $1.3468. The ministers and the ECB issued a formal statement at the end of their meeting saying they are “of the opinion that excessive volatility and disorderly movements in exchange rates are undesirable for economic growth” and they were monitoring the situation closely. Dollar sentiment was certainly not helped by a Wall Street Journal story highlighting the growing concern over the US’s growing twin deficits, which are leading some investors and analysts to “question the unquestionable: the U.S. government's triple-A bond rating”, especially with the “weakening dollar and looming questions about how the U.S. will pay for Medicare and Social Security as scores of baby boomers start retiring”.

The situation was not helped when US Q3 productivity was revised down to 1.8% from a previously reported 1.9% reading, the slowest clip since Q4 2002. It also nudged up growth in unit labor costs to a 1.8 percent pace in a potential boost to inflation. Economists had expected an upward revision to a 2.0% from 3.9% in Q2.

Oil prices slipped back below $42 barrel, while US treasuries edged higher as the yield on the 10-year pulled to 4.22%. Although there will be no data releases from the US, the UK or the Eurozone, markets will keep watch on the $15 billion Treasury auction of 5-year notes, and the extent to which foreign investors will subscribe to the offering.

$1.35 remains inevitable

The better than expected figure from Germany’s helped the euro stay on its upward course. The December survey rose to 14.4 from November’s 13.9, beating for forecasts of a drop to 10.0. The current conditions indicator however, deteriorated further to –64.2, versus –57.8 a month earlier. The concentration of jawboning from ECB officials and European government officials appeared to have ran out of effectiveness today. We think that more aggressive ECB talk is required for the current to taper off at current levels, especially as traders begin to curtail their dollar shorts ahead of next expected fed rate hike.

Support still 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 choppy

The dollar failed to regain the 103 level as choppy trading mostly ensued in a dearth of data/events. Traders await for tomorrow evening’s Q3 GDP expected to come in flat after a 0.1% drop in Q2. Emerging talk of a renewed slowdown in Japan an even a recession. Yet we think that such talk could be sufficient in merely supporting the pair at 102. Preliminary support stands at 101.80, followed by Key foundation at 101.28 low of December 2000, which had not been attained since 1995. Resistance stands at 103.30, 103.60-70 and 103.90, the 38% retracement of the 107.27-101.82 drop.

USDCAD test 1.21 as BoC stands pat

The loonie fell for the 4th straight day after the Bank of Canada left interest rates unchanged at 2.50% out of concerns with the rising Canadian dollar and cooling global demand. The Bank said that “Although oil prices have declined, global economic growth prospects have moderated slightly. The U.S. dollar has depreciated further against major floating currencies, including the Canadian dollar. If exchange rates were to persist at current levels, and if all other economic and financial factors were to remain unchanged, there would be a dampening effect on aggregate demand for Canadian goods and services”. Consensus forecasts were split nearly 50-50% over the decision.

We expect the central Bank to keep rates unchanged next month in the event that USDCAD drops back below 1.19 and oil remains under $45 per barrel.
USDCAD sees resistance at 1.2150, followed by 1.2220—the 30% retracement of the 1.3052-1.1715 move. Support starts at 1.2010, followed by 1.1975 and 1.1900.

Aussie eyes 77 cent support ahead of RBA

With the Reserve Bank of Australia expected to keep rates unchanged at 5.25% due to Australia's Q3 GDP growth (0.3% from 3.0% in Q2), we could see a retreat in AUDUSD towards the 77- cent support. A breach below 76.90, calls up 76.65 support—38% retracement of the 72.20-79.94 move. AUDUSD initial resistance starts at 77.85 and 78.25-30.

No Key Data

The dollar plunged to fresh lows late in the Asian session, stumbling to a new all-time low against the euro at 1.3466 and a fresh 12-year low versus the sterling above the key 1.95-level. The currencies eased up as the European markets stepped, with quiet trading prevailing throughout the day. The economic calendar is light for the remainder of the session, with no key data slated for release.

Euro Ekes Out Fresh High

The euro climbed to another record high against the dollar as Tokyo trading was winding down at 1.3466. Earlier in the session, Germany’s ZEW sentiment survey for December beat economists forecasts for a drop to 10.0, instead climbing to 14.4 and up from 13.9 in November. The current conditions indicator however, deteriorated further to –64.2, versus –57.8 a month earlier. The ZEW said the weakening dollar was a worry since it damages export competitiveness.

ECB President Jean Claude Trichet, in a statement following the FinMin meeting, said that the US and the Eurozone have homework to do in order to smooth fx movements. EURUSD remains buoyed near 1.3450, with resistance eyed 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 Flirts with 1.95

Cable jumped to a new 12-year high above the psychologically key 1.95-level. However, gains above that mark were brief and subsequently fell to 1.9470. Support is seen at 1.9440, followed by 1.94 and 1.9370. Additional floors are seen at 1.9340, backed by 1.93 and 1.9280. Resistance is eyed at 1.95, backed by 1.9525 and 1.9550. A move higher will target 1.9590, backed by 1.9620 and 1.9650.

USDJPY Dips Back Beneath 103

Japan’s October leading indicator index stood at 20.0, down from the previous month 33.3. Meanwhile, the coincident indicator dropped to 11.1, down sharply from a revised 36.4 figure from September.

Finance Minister Tanigaki continued his efforts to talk down the yen, saying appropriate action would be taken if necessary and that current forex moves do not reflect fundamentals. He also hinted at the possibility of bilateral intervention, saying it was his understanding that Eurozone officials view the euro’s ascent as unwelcome.

USDJPY hovers near 102.60, with resistance eyed at 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.

AUDUSD Hovers Near 0.78

The RBA is scheduled to announce its rate decision today, 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.

AUDUSD trades just beneath the 0.78-level, with resistance seen at 0.7840-50, followed by 0.7880 and 0.79. Subsequent ceilings are eyed at 0.7930, followed by 0.7970 and 0.80. Support begins at 0.7750, backed by 0.7730 and 0.77. Additional floors are seen at 0.7670, followed by 0.7640 and 0.76.

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.