The dollar dropped across the board on a combination of strong Germany business sentiment and a $2.50 rise in US crude futures to $46.30 per barrel. The oil rise was triggered by speculators covering their shorts ahead of the cold weather in the Northeast of the US, US northeast, along with heightened geopolitical pressure such as the latest the release of the Osama bin Laden tape encouraging attacks on Mideast oil facilities.

Also hurting the dollar were benign US inflation showing both the headline and core CPI up 0.2% in November from October’s 0.6% and 0.2% respectively. Such figures reduce the case for aggressive tightening by the Fed according to the many estimates by economists, thus would be dollar negative. We see the fed funds rate peaking at 3.25% by year-end.

The bulk of the dollar’s gains emerged in European trade when Germany’s IFO business sentiment survey improved to its best level in 8 months in December as the sentiment index rose to 96.2 from 94.1 in November, surpassing consensus estimates of a 93.9 reading. The current conditions index jumped to 96.0 (highest since Mar 2002) from a revised 93.9 in November, while the business expectations index rose to 96.4 from 94.3, the highest since May. The overall amelioration stabilizes fears of a protracted slowdown and a disruption in exports from a strong euro.

8.30 am US Nov CPI (exp 0.2%, prev 0.6%), US Nov core CPI (exp 0.2%, 0.2%)

The main catalyst to the dollar’s latest drop is an unexpected improvement in Germany’s IFO survey, hitting a 4-month high and relieving worries of an impending deterioration in the Eurozone’s largest economy. A jump in Canada's inflation is also intensifying the drop in USDCAD (see more below).

Traders turn to US inflation figures, expected to show a stabilization last month at 0.2% from October’s 0.6%. Nonetheless, the y/y rise in US CPI could surpass the 2% level, thus justifying the Fed’s tightening and allowing room for further rate hikes. Nonetheless, the Fed’s preferred measure of inflation as defined by core PCE price index, which remained at or below 1.5% y/y over the past 5 months, well under the implied target of 2.0%. A benign CPI reading in the US, i.e. below 0.3% in the headline and core CPI could keep the dollar under pressure. Although the majority of economists expect the fed to raise rates by at least 150 bps next year, markets have yet to see this reflected in the market as the emerging economic conditions could alter such projections relatively fast. We see the fed funds rate peaking at 3.25%

Thursday’s dollar rise emerged after the US Q3 current account deficit rose to a less than expected $164.7 billion, albeit hitting a new record high. This was largely due to the first foreign direct investment inflows into the US. But we warn traders and analysts that the softer than expected increase in the Q3 current account deficit did not take into consideration the record trade deficit in October of $55 bln and the $48.4 billion in net foreign inflows, which was the lowest figure in 12 months. Such shortfall in sustaining the deficit in along with the swelling trade imbalance.

EURUSD strengthens on IFO jump

EURUSD is steadying around the $1.33 level after Germany’s IFO business sentiment survey improved to its best level in 8 months in December, when the sentiment index rose to 96.2 from 94.1 in November, surpassing consensus estimates of a 93.9 reading. The current conditions index jumped to 96.0 (highest since Mar 2002) from a revised 93.9 in November, while the business expectations index rose to 96.4 from 94.3, the highest since May. The overall amelioration stabilizes fears of a protracted slowdown and a disruption in exports from a strong euro.

The euro was unfazed by a 0.5% drop in Eurozone industrial output last month as the year-on-year level rose 1.0%.

EURUSD targets resistance at the 1.3330, followed by 1.3360 and 1.3420. Support starts at 1.32 followed by Monday’s low of 1.3186, a drop below which sees the $1.3150 foundation i.e. the 38% retracement of the 1.2974 low thru the 1.3468 high.

USD extends losses after strong Canadian CPI

USDCAD extends drop below 1.23 to 1.2260s after the CPI rose 2.4% in the year ending in November, the highest since June after October’s 2.3% rise. Core inflation, the key measure for the Bank of Canada , jumped 1.6% from a year ago, following a 1.4% rise and beating expectations of a 1.3% rise. The figures maintain chances of a January rate hike by the BoC.

USDCAD support seen at 1.2240, followed by the support base at 1.2180. Key support stands at 1.2150-- 38% retracement of the rise from the 1.1715 low to the 1.2406 high. Subsequent support stands at 1.2120. Resistance stands at 1.2352—the 38% retracement of the 1.3382-1.1715 move. Key pressure seen at 1.2408, followed by 1.2470.

USDJPY still under pressure

Although USDJPY is attempting to recover from its 104.10 session low, pressure remains at 104.60, followed by 104.90. Downside pressure expected to reemerge, sending the dollar to the 104 figure, which could transitions us back to 103.50 support-- the 61.8% retracement of the 101.90-106.18 rise.

Sterling erases early session’s gains

Cable is erasing the gains made earlier in the European session in the aftermath of that overall dollar decline following the release of the IFO rise. Cable yesterday left EURUSD behind as it surged to a new 12-month high at $1.9549 following a 0.6% rise in UK November retail sales, beating forecasts of a 0.2% increase. And with the week’s strong labor figures, traders are revising their expectations that interest rates could rise from their current 4.75%.

Cable sees support at $1.9280-50% retracement of the 1.9018-1.9549 rally. Key support stands at 1.9220. Upside seen initially capped at 1.9380, followed by 1.9430.

The dollar finished higher across the board to erase all of yesterday’s losses against most currencies, after the US Q3 current account deficit rose to a less than expected $164.7 billion, albeit hitting a new record high. Economists had been expected a riser of as much as $ 7 billion from a revised $164.4 bln in Q2. Although the goods and services deficit rose to $155.3 billion in the third quarter from $151.1 billion in the prior three-month period, unilateral current transfers fell from a net outflow of $14.6 billion to from $18.3 billion.

Foreign official assets in the US rose $60.1 billion in Q3 after a $73.3 increase in Q2, while US-owned assets abroad rose $133.2 billion in Q3 from a $105.8 billion rise in Q2.
But we warn traders and analysts that the softer than expected increase in the Q3 current account does not take into consideration the record trade deficit in October of $55 bln and the $48.4 billion in net foreign inflows, which was the lowest figure in 12 months. Such shortfall in sustaining the deficit in along with the swelling trade gap in October, will reflect into the Q4 data which will be released in February or March.

There were also positive on the on regional manufacturing and the jobs market. The Philadelphia Fed Index on manufacturing rose to 29.6 for December from November’s 20.7, but its employment index fell to 14.7 from 17.4. On the jobs front, US application for unemployment benefits rose fell by 43K to 317K last week, registering the lowest level in 3 years. The 4-week average fell 4.5K to 337K. On the negative side, US housing starts fell by a greater than expected 13% drop to 1.77mln.It would be shaky once the slowdown in housing starts is passed onto the a decline in home sales.

EURUSD drop below $1.3250

Euro shed over 2 cents after the softer than expected rise in the US current account, which was compounded by a profit taking ahead of the end of the week. Also, in addition to tomorrows CPI in the US, traders await Germany’s IFO survey expected to show a renewed drop, this time to 93.9 in Dec from 94.1 in Nov.
Support starts at Monday’s low of 1.3186, a drop below which sees the $1.3150 foundation i.e. the 38% retracement of the 1.2974 low thru the 1.3468 high. Upside capped at 1.3330, followed by 1.338-85.

USDJPY avoid slump for now

The dollar rose from a 1-week low against the yen thanks mainly to the better than expected current account deficit. We would not be surprised if the Japanese authorities begin to intervene covertly at the release of market moving US data. Thus, Japanese authorities used to step in and buy dollars ahead of data to avoid a dangerous drop in the event of weak data or to enforce a rise in the event of strong data.
But we still the dollar revisiting the 104.30, after which 104 becomes a new gateway for 103.50 support, which is the 61.8% retracement of the 101.90-106.18 rise. Upside remains capped at 104.50, followed by 104.90.

8.30 US Q3 Current Account (exp $171 bln, prev $166.2 bln) 8.30 US Nov Housing Starts (exp 1.98 mln, prev 2.03 mln) 8.30 am US Weekly Jobless Claims (exp 342K, prev 357K), (12:00 pm US Dec Philadelphia Fed Index (exp 21.1, prev 20.7)

The dollar remains under pressure as currency markets maintain focus on the swelling US trade imbalance, shrugging this week’s increase in short-term rates. The current account figure is due out this morning, expected to hit a record $171 bln in Q3 from $166.2 billion in Q2. A fresh attack on the dollar is not ruled out, even if the Philadelphia Fed index shows the tepid rise it expected to show. In Q2, the US current account deficit had hit a record $166.2 billion from $147.2 billion in Q1, pushing up the gap to 5.7% of GDP.

Yesterday, president shed some light on the US dollar indicating that Tuesday's Fed rate hike was "a signal to world markets that the chairman [Greenspan] is also aware of the relative currency valuations between the euro and the dollar." Although CB Chief Trichet reiterated his concern with recent euro moves against the dollar, there was hardly any concrete reaction. ECB’s Executive Board’s Padoa-Schioppa hinted that there’s little chances of ECB intervention when he said that FX corrections alone could not be used to fix the twin US deficits.

EURUSD eases below $1.34

Euro is pulling lower, eyeing the $1.3360 support until an expected run-up back to the high 1.3390 in the event of US current account gap release which consists of the aggregate trade deficits for July, August and September as well as the net financial claims. Traders will also mull the headline figure of the Philly Fed survey and its employment index.
A drop below $1.3360, sees stability at $1.3310. But the upside targets 1.3430, followed by $1.3470 and $1.350.

Yen gains emerge forcefully

Yesterday’s emerging yen bullishness on the back of improved sentiment prospects in Japan following large companies planned increase in their capex alleviate chances of an economic downgrade by the Japanese government. The yen’s gains are highlighted by the second daily drop in EURJPY testing below 139. Traders could extend losses to 138.50 support, while USDJPY mulls the 103.50 support, which is the 61.8% retracement of the 101.90-106.18 rise. 103.20 is not ruled by end of today. Upside capped at 104.50, followed by 104.90.

Sterling hits fresh 12-year high after data

Cable leaves EURUSD behind as it surges to a new 12-month high at $1.9549 following a 0.6% rise in November retail sales, beating forecasts of a 0.2% increase. With strong labor markets in the UK, traders are revising their expectations that interest rates will make it past 4.75% Cable sees resistance accumulating at $1.9580. Support starts at 1.95 backed by $1.9470-75.

USDCAD lures fresh selling

The apparent peaking in USDCAD after 9- straight daily gains could draw traders to short the pair towards the 1.22 lever followed by 1.2150-the 38% retracement of the rise from the 1.1715 low to the 1.2406 high. Subseq upport stands at 1.2120. Resistance stands at 1.23, followed by 1.2352—the 38% retracement of the 1.3382-1.1715 move. Key pressure seen at 1.2408, followed by 1.2470.

The dollar fell near the lows of the year against the European currencies and struggled against the other majors after a US Treasury report showed capital dropping 29% to a year low in October at $48.4 billion. The figure was below the trade deficit of $55 billion for the same month, sending an ominous sign of the US waning ability to finance the swelling deficit. The main reason to the decline was the 57% drop in net foreign purchases of US corporate bonds to $19 billion; and the $12 billion in net purchases of foreign stocks by US residents.

For a more detailed charts & analysis on the capital flows figures, please see our latest Article in Articles&Ideas;. The monthly trade flows fell to 0.87 times of the monthly trade deficit, down from as much as 2.0 times in January, making this lowest rate of coverage since October of 2003.

Bush talks dollars & euros

Separately, president Bush made some rare remarks about the US dollar indicating that Tuesday's Fed rate hike was "a signal to world markets that the chairman [Greenspan] is also aware of the relative currency valuations between the euro and the dollar." The dollar did slide briefly on those remarks, lifting the euro up to $1.3444 as the president put his finger on the notion that explains the Fed tightening Bush added: ”…to the extent that the federal government is involved with making the conditions such that a strong dollar will emerge, we'll do everything we can in the upcoming legislative session to send a signal to the markets that we'll deal with our deficits, which hopefully will cause people to want to buy dollars".

In other data, the NY Empire Manufacturing Survey rose to 4-month high of 29.9, beating expectations of a 20.45 reading following a revised reading of 19.76.

Traders turn to tomorrow’s Q3 current account figures expected top show the imbalance deteriorating to a record $171 bln from $166.2 billion. A fresh attack on the dollar is not ruled out, eve if the Philadelphia Fed index shows the tepid rise it expected to show.

EURUSD bears record high $1.33

Euro rallied nearly 2 cents falling some 30 pips away from its all time high of $1.3468. Resistance follows at 1.3430, followed by $1.3470 and $1.350. Support starts at $1.3310, followed by 1.3270. Key foundation held at 1.3240 and $1.32.

USDJPY stabilizes losses

Despite the losses undergone against the euro, USDJPY tempered its losses and stabilized atop the 104 level. Yen sentiment had already improved in the session after the tankan showed large companies planned to increase their capex by 7.7% this fiscal year, well up from the 6.1% rise reported in September, and up 23.4% more than last fiscal year, up from the 20.7% jump forecast in September's survey. This would be the highest growth in capital spending since fiscal 1988.

Drifting around the 104.20s, USDJPY find support at 104.05—50% retracement of the 104.55-60—the 38% retracement of the latest rise from the 101.90 low thru the 1016.18 high. A breach below the figure calls up 103.80, followed by 103.50. Upside capped at 104.50, followed by 104.90.

Sterling advances, British flows mulled

Sterling was particularly aid by the portion of the TICS data, which specified a 4.6% rise in UK holdings of US treasuries in October, registering a bigger than average increase. Since the official purchases of US treasuries accounted for 81% of the total, one could assume that Bank of England might have upped its purchases of dollar securities as a way to temper sterling’s appreciation.

Cable surged 2.5 cents to $1.9460, before stabilizing around the 1.9420s. A breach above $1.9430, could call up $1.9470-75 and $1.95. Support starts at 1.93, backed by 1.9265-70 and 1.92.

8.30 Dec NY Empire Manufacturing Survey (exp 20.45, prev 19.76) 9:00 am US Oct Capital Flow Data (exp $63-65 billion, $63.4 billion)

The dollar is down across the board on a combination of emerging worries of trade deficit financing, mounting security concerns and violence in Iraq, and a pick up in oil prices. A strong outlook by Japanese businesses (see more below) regarding their capital expenditure plans for next quarter have also helped shed a full yen from the US currency. Oil prices are up more than 40 cents to $42.3 per barrel ahead of this morning’s inventory report possibly expected to show a drop after the recently cold spell in the US broke the recent patch of unseasonably cold weather.

What to watch in the Treasury’s capital flow report?

Market’s attention turns to the all important capital flow report from the Treasury expected to show foreigners to have purchased a net $63-65 billion in US assets in October from September’s $63.4 billion. That last figure was a 6% rise from the August thanks to a 31% rise in purchases of US treasuries, which largely emerged from foreign-based private accounts (hedge funds). We expect the rise to go largely into US stocks after these saw 2 straight months of net outflows; at $3.8 and $2.1 respectively. We also see central banks raising their purchases of US treasuries after these were little changed in September. Since yesterday’s trade deficit hit a record high of $55.5 billion, markets are likely to require a figure of about at least $65 billion, ideally with the increase flowing into US treasuries from central banks rather mainly hedge funds. A break of the 2-month streak of next outflow in US stocks would also be essential for stabilizing the renewed attack against the dollar.

USDJPY slumps as tankan capex overshadows Q4 figures.

The dollar is under attack against the yen, losing a full point from the Tokyo mid-session after large Japanese manufacturers issued a bullish forecast for Q1 of next year overshadowed a decline in sentiment in Q4. There was a 4-point drop in the tankan survey of large manufacturing business sentiment to 22 in Q4, which was the first drop after 6 consecutive quarterly improvements, but less than the 5–point drop forecasted back in September. Large non manufacturers sentiment index was flat at 11. For the next quarter, large manufacturers expect a 7-point drop to 15, while large non-manufacturers see a 1-point drop to 10.

But the market had positive reaction as the survey came in not only generally within expectations, but also consisted of positive projections for capital spending. The survey showed large companies plan to increase their capex by 7.7% this fiscal year, well up from the 6.1% rise reported in September, and up 23.4% more than last fiscal year, up from the 20.7% jump forecast in September's survey. This would be the highest growth in capital spending since fiscal 1988.

The dollar’s tumble fell through the 104.55-60—the 38% retracement of the latest rise from the 101.90 low thru the 1016.18 high and now is testing the downward channel support at 104.15. Next support stands at 104.05—50% retracement of the said move. Next foundation seen held at 103.50. Upside capped at 104.50, followed by 104.90 and 105.60—the resistance of the said channel starting from Dec 10.

EURUSD regains $1.3350 despite EURJPY

The dollar’s emerging gloom was highlighted by the fact the EURUSD has gained by a full cent to $1.3375 despite 70-pip tumble in EURJPY. We could see EURSD breaching the 1.3380 resistance in the event of a weak TICS report, with subsequent resistance at $1.3420. Support starts at 1.3310, followed by 1.3270. Key foundation held at 1.3240 and $1.32.

Sterling breaks 61.8% retracement

Cable is up more than a half cent breaching above the $1.9320 resistance -- 61.8% retracement of the drop from the 12-year high thru 1.9013 drop. Key pressure stands at $1.9370, followed by 1.9430. Support starts at $1.9265-70, followed by 1.92.