The dollar rose across the board today after the ECB’s expected decision to hold rates unchanged at 2.00% highlighted the currency’s yield disadvantage. Reports that US Treasury Snow will not make it to this weekend’s G7 meeting in London can be interpreted that the US will be less aggressive in pressing Asia to revalue its currency. Unidentified sources from the G7 did not mention foreign exchange to be amid the topics of discussion in the incoming meeting, thus, relieving the pressure on the dollar. A batch of mixed US data hit the market today, but market positioning stuck to optimistic expectations for tomorrow’s labor report.

US orders for factory goods rose 0.3% in December, following a revised 1.4% advance in November. The December orders for durable goods was revised to 1.1% from its previously reported 0.6% increase. For 2004, Factory orders rose 11.1%, the best since 1992

On the services side, the Institute for Supply Management reported its services index to have slipped to 56.4 this month from 57.3. The new orders index fell to 60.5 from 61.3 while the employment index fell to 52.25 from 55.5.

US worker productivity growth slowed to a 3-year low of 0.8% in Q4, less than expectations of 1.2%. Unit Labor costs rose by a higher than expected 2.3%. For 2004, productivity increased 4.1% down from 4.4% in 2003. Rising productivity had been used to explain the non-inflationary growth of the 1990s, which underpinned the dollar rally.

US Weekly Jobless fell 9K to 316K last week, with the 4-week average dipping by 10.2K to 331.5K. The smoother 4wk average has fallen by its biggest amount since July of last year, which could be a source of a strong payroll report tomorrow.

Markets await Non-farm payrolls and Greenspan

We expect tomorrow’s non-farm payroll report to show a rise of 220K jobs in January, higher than the average consensus of estimates of 170-80K. We see services generating about 160K jobs following a 144K rise. we seen manufacturing and construction generating a total of 12K while government jobs adding about a third of the 29K added last month. The unemployment rate is seen unchanged at 5.4%.

Barring any market moving from Greenspan (see below) or the G7 could drag the euro past the $1.2950 in the vent of a payrolls report above 200K.

We remind you that Fed Chairman Greenspan will give a speech on the current account at 8.45 am, shortly after the nonfarm payrolls report. Greenspan's position on the topic has long been that a weakening dollar is the natural requirement for adjusting the trade gap. His remarks on the possibility of a retreat in foreign capital flows into the US have always hit the dollar when he spoke about the topic. We expect him to reiterate these comments as well as acknowledge the Fed's tightening monetary policy as part of the dollar's decline.

Euro pulls to bottom of consolidation

The euro pulled lower in late morning European trade as the ECB’s expected decision to hold rates unchanged at 2.00% highlighted the euro’s disadvantage especially after yesterday’s Fed hike. Expectations for a strong US payrolls report are also weighing on the euro.


Subsequent support follows at $1.2932—the 38% retracement of the 1.1759-1.3664 move, coinciding with the 100 day MA. Next foundation seen at 1.2820—the 50% retracement of the $1.1986 to $1.3664 move. Resistance starts at 1.303 followed by $1.3070 and followed by 1.3100.

Yen breaks trend line support

USDJPY’s breach of the 104.20 trend line resistance paves the way for 104.80. A breach above 105.20, sees key pressure at the 100-day MA of 105.50. Support starts 104, followed by at 103.74. Further downside follows at 103.35.

Dollar negates sterling’s rise

A 1- cent rally in cable triggered by strong UK service sector purchasing managers' index of 55.9 and a 0.8% rise in January house prices as measured by Halifax, was offset by a 1.5-cent drop in the early US session. Although sterling has dragged the euro to a 6-week low, the currency could see further downside against the dollar towards the $1.8740.

Cable’s support starts at 18745-50, backed by the key trend line support at 1.8675--extending from the $1.7750 low through the $1.8524 low. Upside capped at 1.8870, followed by $1.8908—the 38% retracement of the $1.9549-1.8524 decline. $1.8936 follows as the next target. Key pressure stands at $1.8970.

At 8:30 AM US Q4 Productivity y/y (exp 2.0%, prev 1.8%) US Weekly Jobless Claims (exp 325k, prev 325k) At 10:00 AM US January Services ISM (exp 61.0, prev 63.9) US December Factory Orders (exp 0.7%, prev 1.2%)

The majors were little changed overnight as traders appear to be on the sidelines ahead of tomorrow’s key US labor report. The FOMC’s decision to raise interest rates by 25-basis points to 2.50% was largely anticipated, thus causing little stir in the currency market. The main event this week will be Friday’s closely watched January US jobs report.

Meanwhile, the coming session will see US data consisting of Q4 productivity, weekly jobless claims, January services ISM, and December factory orders. Initial jobless claims are forecasted to remain unchanged from the previous week, standing pat at 325k. The January services ISM is expected to nudge lower to 61.0, down from December at 63.9.

Cable Flirts with 1.89

UK CIPS January services index beat forecasts, climbing to 55.9 versus 54.9 a month earlier. The new business index improved to 56.6, up from 55.4, while input prices slipped to 58.9, down from 59.9. The prices charged component fell to 52.0, compared with 52.8 in December, marking its lowest level in over a year. Separately, UK house prices for January were up 0.8% m/m and 13.7% y/y, marking its lowest annual rate since December 2001.

Resistance starts at 1.89, followed by 1.8930 and 1.8970. Subsequent ceilings are seen at 1.90, backed by 1.9025 and 1.9065. Support begins at 1.8840, followed by 1.88 and 1.8770. Additional losses will target 1.8730, followed by 1.87 and 1.8640.

Euro Stuck in Range

The euro traded narrowly overnight, remaining confined between a 30-point range. Later in the session, the ECB announces its monetary policy decision in which no change is expected. The Bank is seen holding rates steady at 2.0% when it reports at 7:45 AM EST. The subsequent press conference at 8:30 AM EST will also be closely watched.

The Eurozone January services PMI index rose to 53.4, beating both forecasts for 52.9 and December’s 52.6.

EURUSD was largely unchanged, with support beginning at 1.30, followed by 1.2975 and 1.2930. Additional losses will begin at 1.29, followed by 1.2865 and 1.2820. Resistance is seen at 1.3040, followed by 1.31 and 1.3140. Subsequent ceilings are seen at 1.32, backed by 1.3240 and 1.3275.

Aussie Edges Higher

AUDUSD continued to edge higher, with resistance starting at 0.7780, backed by 0.78 and 0.7840. Additional gains will target 0.7875, followed by 0.79 and 0.7950. Support starts at 0.7720, followed by 0.77 and 0.7660. Subsequent floors are seen at 0.7625, followed by 0.76 and 0.7570.

Dollar/Yen Climbs Above 104

Japanese officials continue to talk up the economy, with FinMin Tanigaki saying that the recovery had not stalled. Also, BoJ Governor Fukui said he remained confident that Japan could maintain a sustained economic recovery if the Bank continued with its easy policy stance.

USDJPY encounters resistance 104.20, followed by 104.60 and 105. Subsequent ceilings will emerge at 105.40, backed by 105.75 and 106. Meanwhile, support begins at 104, followed by 103.80 and 103.50. Additional floors will emerge at 103.20, followed by 103 and 102.60.

The dollar found no reason to break out of its range after the Fed raised its fed funds rate by 25 bps to 2.50%, issuing an identically similar policy statement to that of the December meeting. Unlike in the December meeting--which discreetly adjusted its assessment for the labor market conditions to "continue to improve gradually" from “have improved”, there were none of such changes. This was the fed’s 6th rate hike, pushing the fed funds at 2.50%. We continue to expect the Fed to stick to its “measured” tightening until the Fed funds rate reaches the 3.25%, at which point we believe increased signs of a peaking will result into a pause. With the Fed’s preferred measure of inflation as defined by core PCE price index, remaining at 1.5% y/y over the past 6 months, well under the implied target of 2.0%, we see no reason for the Fed to adopt a more hawkish outlook.

As a result of the rate hike, 2-year yield remained at its 3-year high of 3.32%, while 10-year yields were little changed at 4.15%. More importantly, the spread between the two yields (10 year – 2 year) is at its lowest level since May 2001 at 0.8%. SEE CHART IN MORE DETAILED ARTICLE IN ARTICLE & IDEAS. Unlike a falling yield spread where both rates are rising or falling closely together, today’s falling spread between long and short term rates is caused by directionless long yields (courtesy of Asian purchases of US treasuries, benign inflation outlook and possibly benign growth outlook) and rising short yields (courtesy of the Fed’s tightening which is a normalization of monetary policy). As long as long yields shun the Feds tightening, the message of the market remains the following: Fed’s current tightening aims at normalizing monetary policy instead of containing an overheating economy, in which case currency markets give no growth reward to the dollar.


More euro consolidation

Euro’s carries on its consolidation around the $1.3010-60s, and is unfased after the ECB widened the dollar’s yield advantage against the euro by 50 bps. Resistance remains capped at $1.3070, followed by 1.3100. Renewed selling seen support at 1.3020, followed by $1.2955-60. Subsequent support follows at $1.2943—the 38% retracement of the 1.2223-1.3664 move, followed by the 100 day MA of 1.2900 and 1.2820—the 50% retracement of the $1.1986 to $1.3664 move.

Yen up quietly

USDJPY’ quietly tested the 104 figure before caving back in to the 103.70s. 103.74 remains a point of resistance — 61.8% retracement of the 104.30-102.75 move. Subsequent resistance stands at the 104 trend line resistance extending from the 111.42 high thru the 105.12 high. Key resistance extends to 104.50. Downside starts at 103.35—the 38% retracemnet of the said move, with subsequent foundation at 102.55-60 and 102.30.

Aussie rallies after Fed hike

Aussie pushed up thru the 77.50 trend line resistance after the Fed’s decision to raise rates. The Aussie gained nearly 1/2 a cent after the Fed stayed with the its measured pace of tightening which is more of a US dollar negative.The Reserve Bank of Australia expectedly left rates unchanged at 5.25%. But lingering expectations of a rate hike this quarter is underpinning the higher yielding Aussie. Breaking the 77.50 cent resistance, which is the 61.8% retracement of the 79.44-74.40 cent move, Aussie now sees pressure at 77.80 followed by 78.35. Support starts 77.20-25 followed by at 76.92—the 50% retracement of the drop from the 79.44 high thru the 74.40 low. Subsequent targets seen at 76.36—the 61.8% retracement.

At 2:15 PM US FOMC Interest Rate Announcement (exp 2.5%, prev 2.25%) At 9:00 PM
President Bush Delivers Annual State of the Union Address

Currencies continued to consolidate within recent ranges as traders look ahead to today’s FOMC monetary policy meeting and President Bush’s State of the Union address later in the evening. The dollar was slightly softer overnight, slipping toward 1.3092 versus the euro and 103.39 against the yen.

With markets already pricing in a 25-bp rate hike when the Fed announces its decision at 2:15 PM EST, the key focus will be the subsequent statement. Traders will scrutinize the FOMC statement for further insight on coming policy decisions, as well as any discrepancies from previous statements, namely its ‘moderate pace’ line. The FOMC is forecasted to lift its benchmark-lending rate to 2.50%, up from 2.25%.

Also on the agenda today will be President Bush’s State of the Union address. While the speech usually has a minimal impact on currency markets, any comments from the President suggesting greater resolve in reducing the twin deficits may provide the dollar a near-term boost. President Bush’s State of the Union address is scheduled for later this evening at 9:00 PM EST.

Euro Edges Higher Despite Sluggish German Data

The euro gained versus the dollar overnight despite another bout of weak economic data from the Eurozone’s largest economy. Germany’s January jobless total jumped by 227k to 4.714 mln, thereby lifting the unemployment rate from 10.8% in December to 11.4%. The German Labor Office said the jump in jobless could be attributed to the statistical effect from jobs market reform. Meanwhile, Germany’s December retail sales continued to decline, dropping 0.3% m/m and 2.7% y/y, worsening from Novembers 0.3% monthly rise and 1.7% annual decline. The December figures also disappointed forecasts for a 1.7% monthly gain and a 0.8% annual increase.

The euro climbed just shy of the 1.31-level. Support starts at 1.3040, followed by 1.3020 and 1.30. Subsequent floors are seen at 1.2975, backed by 1.2930 and 1.29. Resistance is seen at 1.31, followed by 1.3140 and 1.32. Additional gains will target 1.3240, backed by 1.3275 and 1.33.

Aussie Mired in Range

The Reserve Bank of Australia, as largely expected, left monetary policy unchanged when it announced its decision earlier in the evening. The RBA held steady with interest rates at 5.25%.

AUDUSD traded within a narrow range overnight, with resistance starting at 0.7760, backed by 0.78 and 0.7840. Additional gains will target 0.7875, followed by 0.79 and 0.7950. Support starts at 0.7720, followed by 0.77 and 0.7660. Subsequent floors are seen at 0.7625, followed by 0.76 and 0.7570.

Cable Buoyed

Cable continues to hover near its session highs, holding steady near 1.8880. Resistance starts at 1.89, followed by 1.8930 and 1.8970. Subsequent ceilings are seen at 1.90, backed by 1.9025 and 1.9065. Support begins at 1.8840, followed by 1.88 and 1.8770. Additional losses will target 1.8730, followed by 1.87 and 1.8640.

Dollar/Yen Slips Lower

USDJPY encounters resistance 103.80, followed by 104 and 104.20. Subsequent ceilings will emerge at 104.60, backed by 105 and 105.40. Meanwhile, support begins at 103.20, backed by 103 and 102.60. Additional floors will emerge at 102.35, backed by 102 and 101.70.

The Institute for Supply Management’s manufacturing activity index slipped to 56.4 in January from 57.3 in December, surprising economists who had been expecting no change. The ISM's new-orders index dropped 6.1 points to 56, while the employment index came gained 4.8 points to 58.1. But jumps in hiring and production helped to offset the slide in new demand. The prices paid index stabilized to 69 from 72, but remained above the 50 figure for 35th consecutive month.

Separately, construction spending rose 1.1% in December after a 0.3% rise in November. Construction spending for the year rose 9%, the highest since 1996.
Traders turn to Wednesday’s FOMC decision on interest rates, which is expected to produce the 6th rate hike to 2.50%. We see the Fed sticking with the “measurable" reference, signaling a gradual policy tightening. We expect the Fed to continue using the same language that it used in its past 3 FOMC meetings indicating a contained level of inflation and an upbeat economic outlook, including the gradual withdrawal of policy accommodation.

The spread between 2-year and 10 year yields continues to narrow, with the 10-year yield at a 6 week low of 4.14% and the 2-year yield up at 3.28%. A continued narrowing of the spread reflects the Fed’s tightening coupled with a non-inflationary outlook, which could be assign of future slowdown in the economy.

Yen hovers at 103.50s

Japan's Minister Sadakazu Tanigaki told said today Japan should be careful in how it manages its foreign exchange reserves, the world's largest at $844 billion. We at Forexnews think the time has come for Japan to begin lightening its massive holdings ($725 bln) of US securities in order to avoid an a blow to its portfolio from further dollar declines. Japanese authorities cannot afford accumulating more in US treasuries when the dollar is expected to shed more of its value after an 18% decline in trade-weighted terms over the past 3 years. A gradual Japanese retreat from US dollar securities into non-dollar assets is inevitable in order to avoid massive losses on the central bank’s US dollar portfolios. The ECB is reported to have expected to have lost over a $1 billion on its US dollar holding as a result of the euro's appreciation against the US currency. Japan loses $7.2 billion for each yen lost against the US dollar. A drop to 97 yen from 103 would inflict a $43 billion hole in Japan’s portfolio of US assets. That explains the drop in Japanese holdings of US treasuries between September and October of last year--the first month-to-month decline in three years. See chart below.

USDJPY’s gains still sees preliminary resistance of 103.74—61.8% retracement of the 104.30-102.75 move. Subsequent resistance stands at the 104 trend line resistance extending from the 111.42 high thru the 105.12 high. Key resistance extends to 104.50. Downside starts at 103.35—the 38% retracemnet of the said move, with subsequent foundation at 102.55-60 and 102.30.

Euro in pre FOMC-G7consoliation before FOMC, G7

Traders are unwilling to sway the euro past its 1.30-1.31 range ahead of this week’s events. Eurozone PMI pushed up in January, compared to its US and UK counterparts which both fell. Eurozone’s manufacturing PMI improved to 51.9 in January from 51.4, with increases in the new orders and the output indexes edged up to 53.3, up from 52.3. The employment index slipped further into contraction territory, at 48.1 from 48.3.

Euro’s consolidation around the $1.3050s, is likely to continue tomrow unless the Fed releases veers away from its policy statement of the past 5 meetings. Resistance remains capped at $1.3070, followed by 1.3100. Renewed selling seen support at 1.3020, followed by $1.2955-60. Subsequent support follows at $1.2943—the 38% retracement of the 1.2223-1.3664 move, followed by the 100 day MA of 1.2900 and 1.2820—the 50% retracement of the $1.1986 to $1.3664 move.

Cable little ends where it started after PMI

Cable bounced back despite the a drop in the UK’s manufacturing PMI, but stabilized at the downward channel on the 4-hour chart. The Jan PMI fell to its lowest level since July 2003, defying forecasts for an increase to 53.7, instead dropping to 51.8 in January, down from 53.3 a month earlier. The employment component tumbled to its lowest level since 2003, falling to 48.3, versus 48.8. On the bright side, consumer credit edged up to 1.524 bln sterling in December, versus 1.359 bln sterling, and exceeding forecasts for an increase to 1.4 bln sterling.

Upside remains capped at the downward channel of $1.8850 resistance at $1.8908—the 38% retracement of the $1.9549-1.8524 decline. $1.8936 follows as the next target. Key pressure stands at $1.8970, followed by $1.90—the trend line resistance extending from 1.9549 high thru the 1.9488 high.

At 10:00 AM US December Construction Spending (exp 0.5%, prev –0.4%) US December Manufacturing ISM (exp 57.0, prev 57.3)

The majors continued to trade within range in the overnight session, as traders await central bank meetings from the RBA, the FOMC, and the ECB later this week. Also in focus will be Friday’s key US jobs report. The dollar held steady against the majors, trading near 1.3030 versus the euro and 103.75 against the yen.

In the coming session, markets will look ahead to US December manufacturing ISM. The figure is expected to slip marginally to 57.0, down from 57.3 – which compares to a slightly better than expected showing in Europe and a softer reading in the UK.

Euro Mired Within Range

The Eurozone manufacturing PMI data edged out forecasts, improving to 51.9 in January, above the 51.4 reading from December. The new orders index improved to 52.9, up from 51.6, while output edged up to 53.3, up from 52.3. However, the employment index remained dismal, slipping to 48.1, down from 48.3 in December, marking its 44th consecutive month of contraction. Also, the Eurozone’s December unemployment rate increased to 8.9%, up from a revised 8.8% in December.

The euro traded in a confined range overnight, with support starting at 1.3020, followed by 1.30 and 1.2975. Additional losses will target 1.2930, backed by 1.29 and 1.2850. Gains will target resistance at 1.3065, followed by 1.31 and 1.3140. Subsequent ceilings are seen at 1.32, backed by 1.3240 and 1.3275.

Cable Steady Above 1.88

UK’s manufacturing PMI fell to its lowest level since July 2003, defying forecasts for an increase to 53.7, instead dropping to 51.8 in January, down from 53.3 a month earlier. The new orders index also fell to its lowest level since June 2003, down to 51.9, versus 54.8 in December. The employment component also tumbled to its lowest level since 2003, falling to 48.3, versus 48.8. Meanwhile, December consumer credit edged up to 1.524 bln sterling, versus 1.359 bln sterling, and exceeding forecasts for an increase to 1.4 bln sterling.

Cable trades above the 1.88-level, with further losses encountering support at 1.8770, backed by 1.8730 and 1.87. Additional losses will find support at 1.8640, followed by 1.86 and 1.8580. Resistance is eyed at 1.8840, followed by 1.8885 and 1.89. Subsequent ceilings will emerge at 1.8930 and 1.8970.

Dollar/Yen Inches up Toward 104

USDJPY edged higher overnight, climbing just shy of the 104-level. Japan’s Finance Minister Tanigaki spoke earlier in the session, saying that more care was needed in managing the nation’s FX reserves due to its extremely large size. He said that liquidity, stability and avoiding losses were important for FX reserves. Tanigaki spoke of the upcoming G7 FinMin in Boca Raton, saying that he expects the G7 to share a similar view on forex as Japan. While it remains up to China to determine its currency policy, Japan hopes for more appropriate steps. He also said that Japanese firms are now more resilient to yen strength than they were in the past. However, further growth in the US current account deficit would be worrisome to the global economy and that the burgeoning deficit cannot be resolved through currencies alone. Lastly, Tanigaki said that sudden and volatile forex moves were undesirable.

USDJPY edged up higher overnight, with resistance 104 and 104.20. Subsequent ceilings will emerge at 104.60, backed by 105 and 105.40. Support begins at 103.20, backed by 103 and 102.60. Additional floors will emerge at 102.35, backed by 102 and 101.70.

Aussie Slips on Soft Data

Australia’s manufacturing PMI dropped 5.9-pts to 54.9 in January. Although the survey remained above the key 50-level, the survey pointed to milder growth for the months ahead. The production component fell 7.9-pts to 55.5, while jobs fell 6.8-pts to 50.9. Separately, the December trade deficit grew by more than expected, rising to A$2.37 bln, exceeding forecasts of a A$2.2 bln deficit. The soft data reinforce calls for the RBA to leave monetary policy unchanged when it announces its decision later this evening (5:30 PM EST)

The Aussie fell to the 0.77-level following the soft economic reports. Support starts at 0.7660, followed by 0.7625 and 0.76. Further losses will target 0.7570, backed by 0.7540 and 0.75. Resistance begins at 0.7725, followed by 0.7760 and 0.78. Subsequent ceilings are seen at 0.7840, backed by 0.7875 and 0.79.