At 10:00 AM US November Existing Home Sales (exp 6.75 mln, prev 6.75 mln)

The euro maintained its buoyant tone across the board, edging up to a fresh record high against the dollar overnight to 1.3645 and a one-year high against the sterling at 0.7080. Currency markets continue to favor the euro over the dollar as emphasis remains on the US twin deficits. Billionaire investor Warren Buffett’s bearish sentiment on the dollar has been much discussed recently, with a purported $12 billion invested in foreign currencies – he has made no secret of his continued strong positions in the euro, sterling, and several other currencies.

The greenback failed to significantly capitalize on yesterday’s better than expected consumer confidence data. The Conference Board reported that consumer confidence surged sharply in December, rising to a 5-month high at 102.3, far exceeding both 94.6 forecasts and November’s 92.6 reading.

Euro Rises Across the Board

The euro edged up to a new record high against the dollar overnight at 1.3645, while also climbing to a one-year high versus the sterling at 0.7080 and 1 ½-year high versus the yen at 140.86. Earlier in the session, Germany’s January Gfk consumer sentiment rose to 2.9 in January, compared with a downwardly revised 2.6 figure in the previous month.

Resistance in EURUSD starts at 1.3670, followed by 1.37 and 1.3725. A move higher will target 1.3760, followed by 1.38 and 1.3850. Support begins at 1.36, followed by 1.3580 and 1.3520. Subsequent floors are seen at 1.35, backed by 1.3480 and 1.3430.

Dollar/yen Buoyed Above 103

Dollar/yen hovered above the 103-level, with resistance seen at 103.50, followed by 103.80 and 104. Subsequent ceilings are seen at 104.20, backed by 104.65 and 105. Support begins at 103, followed by 102.80 and 102.20. Additional floors are seen at 102, followed by 101.80 and 101.30.

AUD Backs Away from 0.78

The Aussie drifted away from the 0.78-level, but traded within a narrow range overnight. Support is seen at 0.7760, backed by 0.7725 and 0.77. Additional floors are eyed at 0.7670, followed by 0.7640 and 0.76. A move back above 0.78 will target 0.7840-50, followed by 0.7880 and 0.79. Subsequent ceilings are eyed at 0.7944 – the November high and 0.80.

Cable Slumps Toward 1.92

Cable encounters support at 1.92, followed by 1.9175 and 1.9130. Additional floors are seen at 1.91, backed by 1.9060 and 1.9020. Gains will target resistance at 1.9280, backed by 1.93 and 1.9330. Subsequent ceilings are seen at 1.9370, followed by 1.94 and 1.9440.

At 10:00 AM US November Existing Home Sales (exp 6.75 mln, prev 6.75 mln) US December Consumer Confidence (exp 94.0, prev 90.5)

Traders maintained bearish sentiment on the greenback, pushing the currency to a new all-time low against the euro at 1.3640 in London trading. In the session ahead, markets will look ahead to US November existing home sales and December consumer confidence. The Conference Board’s consumer confidence survey is forecasted to climb to 94.0 in December, up considerably from last month’s figure of 90.5. Economists are attributing the upbeat forecasts to the recent declines in the price of oil.

Yen Supported By Upbeat Data

The notion of Japan’s economy being in recovery was further strengthened by data released earlier in the session. Japan’s November industrial output jumped by a preliminary 1.5%, reversing its 1.3% decline in the previous month. Retail sales defied economists’ forecasts for a 0.6% fall, instead edging up by 0.7% in November and up from a 0.9% drop in October. Japan’s November unemployment unexpectedly declined to 4.5%, down from 4.7% in the previous month. The jobs-to-applicants ratio inched up to 0.92, up from October at 0.88. However, nationwide CPI continued to decline, dropping 0.2% in November, adding onto last month’s 0.1% fall.

Japanese equities were propped up by the positive economic data, with the Nikkei average climbing by 0.54% to 11,424.13 – marking its highest close in five months. Also benefiting was the yen, which dipped beneath the 103-level to 102.86. Interestingly, comments from Mr. Yen, Eisuke Sakakibara suggested there was a 50% chance that the Japanese government would not intervene in the currency markets with dollar/yen above the 100-level. He said there was further leeway not to intervene given Japan’s economic recovery over the past year and the current strength of the Nikkei average.

USDJPY crept back above the 103-level with resistance eyed at 103.30, backed by 103.70 and 104. Additional ceilings are seen at 104.20, followed by 104.65 and 105. Losses will target interim support at 102.85, backed by 102.20 and 102. Subsequent floors are seen at 101.80, followed by 101.30 and 101.

Euro Maintains Bullish Tone

The euro reached another all-time high overnight, climbing to 1.3640 against the dollar. The euro’s gains yesterday stemmed from comments from a Eurozone official suggesting that the ECB was comfortable with current euro levels and was unlikely to intervene.

EURUSD holds steady near its all-time highs at 1.3640, with resistance starting at 1.3670, followed by 1.37 and 1.3725. A move higher will target 1.3760, followed by 1.38 and 1.3850. Support begins at 1.36, followed by 1.3580 and 1.3520. Subsequent floors are seen at 1.35, backed by 1.3480 and 1.3430.

AUD Edges Above 0.78

The Aussie edged up over the 0.78-level overnight, climbing to 0.7812. Resistance is seen at 0.7840-50, followed by 0.7880 and 0.79. Subsequent ceilings are eyed at 0.7944 – the November high and 0.80. Support begins at 0.7760, backed by 0.7725 and 0.77. Additional floors are eyed at 0.7670, followed by 0.7640 and 0.76.

Cable Climbs Shy of 1.94

A move past 1.94 will target resistance 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 1.9370 and 1.9340. Additional floors will emerge at 1.93, followed by 1.9280 and 1.9245.

No Key Data

In a quiet start to the last week of 2004, the dollar continued to trade on weak footing against the majors, slumping to a fresh record low versus the euro earlier in the session. Nevertheless, trading remained thin overnight with the London market closed for holiday. The greenback hovers near 1.3535 versus the euro and 103.75 against the yen heading into New York trading. Meanwhile, the economic calendar is light this week, with US data to include December consumer confidence, weekly jobless claims and November Chicago PMI.

Euro Edges to Fresh Record High

The euro inched up to a new record high against the dollar in narrow overnight trading to 1.3553. Resistance begins at 1.3580, followed by 1.36 and 1.3640. Additional ceilings are eyed at 1.3670, backed by 1.37 and 1.3725. Interim support starts at 1.3520, backed by 1.35 and 1.3480. Subsequent floors will emerge at 1.3430, backed by 1.34 and 1.3340.

Dollar/yen Backs Away from 104

The yen weakened initially following the earthquake and tsunami’s the shook parts of Asia this weekend, with a death toll of over 20,000. Traders sent the yen beneath the 104-level versus the dollar, but quickly recovered.

The coming week will see Japan’s November household spending, November unemployment rate, November large retailer’s sales, and November industrial production.

Support for the pair 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.

Aussie Buoyed Above 0.77

AUDUSD climbed above the 0.77-level to its highest level in nearly 3-weeks at 0.7725. Further gains will target 0.7760, followed by 0.78 and 0.7840-50. Subsequent ceilings are eyed at 0.7880, backed by 0.79 and 0.7944 – the November 26 high. Losses will encounter support at 0.77, followed by 0.7670 and 0.7640. Additional floors are seen at 0.76, backed by 0.7530 and 0.75.

Cable Inches Higher

Cable edged up slightly higher overnight, rising to 1.9262. Resistance is seen at 1.93, followed by 1.9330 and 1.9370. Additional gains will target 1.94, backed by 1.9440 and 1.95. Meanwhile, losses will encounter support at 1.9210, followed by 1.9175 and 1.9130. Subsequent floors are seen at 1.91, followed by 1.9070 and 1.9040.

***The following is a synopsis of our 2004 review and 2005 preview. A more detailed report to be issued later in the week.***

This year’s dollar decline is the result of a trio of factors; US monetary policy, US fiscal policy and the weak dollar policy of the US Treasury.

The Fed’s cheap money policy of the first half of the year underscored the dollar’s unattractive yields relative to the rest of the world. But the 5 interest rate hikes from the Fed failed to boost the dollar mainly because of the escalating trade deficit, whose pace of growth has outweighed the rate of foreign inflows into the US, thus raising worries about the US ability to finance its record deficit.

The widening budget deficit is important to currency markets because poses the risk of further swelling of government and household debt via higher interest rates. The argument goes as such; when US-bound foreign capital flows fail to cover the swelling trade deficit, foreign investors require a higher rate of return to hold US assets necessitated by rising rates, especially when the dollar depreciates in value. It is these higher rates that would exacerbate the personal and government debt. The dollar decline intensified after the elections on the rationale that pres Bush will make the tax cuts permanent, thus erasing any hopes of stabilizing the swelling budget deficit.

The dollar decline was also made possible by the US Treasury’s implicitly clear weak dollar policy despite its touting of the strong dollar being in the US interest. Two clear examples of this; 1) the US ability to exclude any statements urging for stabilizing dollar decline in the G7 meetings underscores the US support for the falling greenback; 2) the Treasury Secretary Snow insists the dollar’s value should be determined by the markets when the markets have shed 33% off the currency’s value in trade weighted terms since January 2002.

With both the trade and budget deficits accounting for more than 10% of GDP, and the US Administration showing no signs of containing the dollar slide, this had left very little choice for traders other than to sell the US currency.

Looking ahead, we expect the dollar’s secular bear market to continue throughout 2005 due to a continuation (if not a deterioration) of the aforementioned factors. Although the Fed is set to raise rates, we see the structural deficiencies of the US economy, namely the twin deficits, overwhelming the advantages of higher US yields. The latest trend of monthly foreign capital flows failing to cover the monthly deficit will require foreign investors to demand higher rates of returns from US paper, in which case means a higher dollar or higher US rates. Neither the dollar will can deliver that option nor US rates can rise high enough to contain those concerns due to the mixed messages sent by the US economy.

We expect intermittent bouts of dollar bounces in the first quarter resulting from profit talking by speculators and asset managers, period declines in oil prices and any signs of further interest rate hikes from China. We expect China’s Bank to make another rate hike in mid Q1, which would pressure commodities such as metals, which could boost the dollar to as high as $1.2900 against the euro and 109 against the yen. But the positive dollar impact from a China tightening will eventually run its course as that would pave the way for an eventual rebalancing of the yuan into a basket system of currencies, including the euro. The dollar weak story is here to stay.

In the week of Dec 27, 2005, Forexnews will only publish the US TRADING PREVIEW and not the EUROPEAN & US SUMMARY. Regular Previews/Summaries will resume in the week of January 2.

Thin liquidity in Asian & European bourses and the closure of US markets in observance of Christmas Eve paved way for a new all time high in the EURUSD at $1.3546. Although it is not unusual for the euro to strengthen in the final 2 weeks of the year, this year underlines accumulating negative sentiment in the US dollar.

As far as the US administration is concerned, large part of the dollar's declines were the result of the all-but explicit weak dollar policy of the US Administration as well as the Administration's continuously profligate fiscal polices. The dollar decline was simply exacerbated after the elections on the rationale that pres Bush will make the tax cuts permanent, thus erasing any hopes of stabilizing the swelling budget deficit. With both the trade and budget deficits accounting for more than 10% of GDP, and the US Administration showing no signs of containing the dollar slide, this left very little choice for traders other than to sell the US currency. And with the net foreign investment into the United States falling below the nation's trade deficit in goods and services, the fear of unsustainable deficit finance has become a reality.

The euro was anything but hindered after comments from Dutch Finance Minister Gerrit Zalm who said the euro rise against the dollar was still within margins. Even more interestingly, Zalm, said he hoped the ECB would raise rates soon because that would reflect a sign of higher growth. Such comments, underline the implicit approval for the euro’s rise from not only the ECB but also from ministers. Traders are already talking about the February G7 meeting and what decisions will entail regarding the dollar weakness. But market players are also aware of the US ability to leave out any statements regarding the falling dollar in the last G7 meeting.

EURUSD faces resistance at $1.3550, followed by 1.3570. Support seen at 1.3460, followed by 1.3420 and 1.3380.

The barrage of mixed US data reinforced the selling in the dollar, which emerged in the preceding Asian and European sessions. A 12% drop in November US home sales was the largest in 10 years, while applications for unemployment benefits rose 17K to 333K. Although orders for durable goods surged 1.6% in November, orders excluding transportation items such as airplanes fell 0.3% while those in October were revised to a 1.3% decline from a previously reported 0.7% rise. On the bright side, personal incomes rose 0.3% above the 0.2% rise in spending, thus lifting the savings rate to 0.3% from 0.1%. A retreat in consumption may not necessarily seen as a dollar negative because it would highlight the nation’s low savings rate, which stood at as low as 0.2% in October, thus underlining the nation’s trade deficit. The savings rate rose to 0.3% in November.

Inflation remained benign after the core PCE price index stood unchanged at 1.5% in the year ending in November, thus well within the Fed’s implied inflation target of 2.0%. Although the Federal Reserve does not have an implicit inflation target, officials have often referred to this indicator as the more viable inflation measure. A low figure within 1.4-1.5% would confirm benign statistical US inflation, which could be dollar negative.
On the bright side, the Univ of Michigan sentiment survey rose to 97.1 in December from 95.7.

EURUSD hits $1.35

The euro hit a new record high in a combination of thinning trading volumes and uninspiring US data. The higher than expected trade surplus from the Eurozone helped quell concerns of the appreciating currency impacting exports. A remark from former IMF chief economist Kenneth Rogoff indicating that the euro could soar as high as $1.50 next year as a vital requirement for a shrinkage in the US trade deficit is also helping to underline the twin deficit problems of the US.

EURUSD faces resistance at $1.3520, followed by 1.3570. Support seen at 1.3460, followed by 1.3420 and 1.3380.

USDCAD retreats to 1.23

A flat Q3 GDP reading in Canada did not prevent the CAD from dragging the USD back down to the 1.23 level. Although the GDP was expected up 0.2%, the momentum against the greenback overwhelmed all other factors.
Support stands at 1.2280 and 1.2240. Resistance starts at $1.2360 followed by $1.2450 and 1.25.

Sterling hits 11-month lows vs euro after data

The 1-cent bounce in cable was not representative of sterling’s tumble against the euro to an 11—month low of 70.38 pence after the UK current account deficit rose to GBP 8.77 bln in Q3 from GBP 5.82 bln. Forecasts had been for fall to GBP 6.5 bln. The data accelerates the gloom in the pound versus the euro but cable was spared due to the dollar’s broad drop.

Cable still sees gains limited at $1.93, followed by $1.9330. Support starts at $1.91—the 38% retracement of the rise from the $1.8277 low (Oct 29) to the year’s high of $1.9549. Subsequent support follows at 1.9070 followed by 1.905