The dollar retreated modestly following its strong run in European trade as FX markets remained unconvinced with fed Chairman Greenspan’s endorsement of the Pres Bush’s social security privatization plans. His upbeat assessment of the economy was brief but consistent. Yet traders contented themselves with the dollar gains and backed off after oil hit a fresh 4-month high at $52.97 per barrel. The culprit this time for oil was a larger-than-expected 1.8 mln draw in US distillate oil inventories.

US treasuries were hardly moved from their 4.37-8% level by Greenspan’s testimony, which offered no fresh indications on monetary policy. The dollar had strengthened on hopes that Greenspan could go further in forecasting stabilization in the US current account and budget deficits--the two major handicaps to the dollar’s long term outlook.

Aussie struggles to bounce

The Aussie barely made it above the 78.30 figure after losing a full cent following a weak GDP report, which made another rate hike an unlikely possibility. The rate hike was rationalized mainly with higher inflation than with overheating growth.

Hovering around the 78.30, Aussie faces pressure at 78.60 and 78.90. Support 77.80, followed by major foundation at 77.40—the trend line support extending from the 75.03 low through the 76.09 low.

Euro regains $1.3130s

The euro regained some composure as it bounced back above $1.3130s once Fed Chairman Greenspan made no concrete remarks regarding the prospects, only reiterating his upbeat prospects for the US economy. Since traders had no sense of whether the Fed would be omitting its “measured” reference in its FOMC statements. Now that the ECB downgraded its 2005 Eurozone growth outlook to 1.6% from 1.9% has eroded all possibilities of an ECB rate hike.

EURUSD drifts around the $1.3120s, facing resistance at 1.3160 followed by $1.3190. nearing the $1.3070 support -- 38% retracement of the euro’s gain from its year’s low of $1.2730 to the 1.3277 high. Further support follows at 1.3040-45 backed by 1.3010.

10:00 am Fed Chairman Greenspan Testiftes to House Budget Committee on Budget, 7:00 pm Fed Board Gov Gramlich Speaks, 9: 05 pm San Francisco Fed's Yellen Speaks
The dollar’s extends gains versus the European currencies on a combination of weak growth figures from Old Continent and expectations of renewed optimism by Fed Chairman Alan Greenspan in his upcoming Congressional testimony this morning. The dollar dragged the euro to a 1 ½ week low at $1.31 while sending the Aussie to a 3-week low at 77.70 cents.

Eurozone GDP growth slowed to 0.2% in Q4, from a downward revised 0.2% in Q3 after having initially been reported at 0.3%. Slowing export growth was noted in throughout the region while rising consumer spending in France and Spain were shadowed by a slump in Germany and Italy.

The dollar is also seen propped higher on expectations that Fed Chairman Greenspan will reiterate his upbeat forecasts for the US economy as was done in his testimony 2 weeks ago. In addition, Greenspan could go further in forecasting stabilization in the US current account and budget deficits, the two major handicaps to the dollar’s long term outlook. But it would be just as important to note the extent to which Greenspan’s support for pres Bush privatization of social security clashes with some Representatives.

Traders will also watch this morning’s oil inventory data from the US, expected to show a 1.4 mln barrels draw in oil distillates. Continued cold weather in the North east should also keep prices supported above $51.50 pb.

Euro extends losses

The euro accumulated fresh losses on new signs of stagnant growth in the Eurozone. The slowdown in Q4 GDP growth to 0.2% from 0.2% was mainly due slower export growth to 0.5% from 1.3%.

Separately, the ECB downgraded its 2005 Eurozone growth outlook to 1.6% from 1.9%.
EURUSD drifts around the $1.3120s, nearing the $1.3070 support -- 38% retracement of the euro’s gain from its year’s low of $1.2730 to the 1.3277 high. Further support follows at 1.3040-45 backed by 1.3010. Upside starts at 1.3160 followed by $1.3190.

Aussie attempts post-rate hike stability

The Aussie edges up towards 78 cents after losing a full cent following yesterday’s rate hike announcement from the Reserve Bank of Australia of a 25 basis point rate hike to 5.5%. Although the probability of a rate hike was abut 50%, the Aussie drop was explained by expectations of peak in Aussie rates, in light of slowing growth concerns.

The RBA explained the rate hike as a result of “stronger inflationary pressures” and that ”Price increases at the producer level picked up appreciably at all stages of production during the second half of 2004”. The central bank said that although inflation “currently consistent with the target, was higher than had been expected, and is forecast to increase to around 3 per cent by the end of next year”. It added that the rate hike aimed also at stabilizing strong growth in domestic spending despite the slowdown in 2004 GDP.
Aussie faces resistance at 78.30, followed by 78.60 and 78.90. Support 77.80, followed by major foundation at 77.40—the trend line support extending from the 75.03 low through the 76.09 low.

Yen tempers dollar gains

The yen took back ½ of its losses from early European trade now drifting at 104.80s. The currency is partially propped by its rally against the Aussie. USDJPY support starts at 104.65—38% retracement of 104.08-105.56 move, followed by 104.20 and 103.60. Upside capped at 105 and 105.30.

Cable tests $1.91

Cable joins the euro damage as it tests the $1.91 figure. A breach blow it sees support at $1.9030, followed by $1.8960. Upside initially capped at $1.9140, followed by 1.9180.

The Reserve Bank of Australia announced it raised its the cash rate by 25 basis points to 5.5%, explaining the move as a result of “stronger inflationary pressures” and that “”Price increases at the producer level picked up appreciably at all stages of production during the second half of 2004”. The central bank said that although inflation “currently consistent with the target, was higher than had been expected, and is forecast to increase to around 3 per cent by the end of next year”. It added that the rate hike aimed also at stabilizing strong growth in domestic spending despite the slowdown in 2004 GDP.

But the Aussie is down a third of cent at 78.50s after the announcement. Key support seen at 78.23—the 38% retraecment of the 75.24-79.57 move. Key support seen at 78 cents. Upside potential seen breaking the 78.80 high, en route to 79.30, a breach above which sees 79.60.

In other news, US manufacturing activity continued to slow in February as the Institute for Supply Management’s manufacturing index fell to a reading of 55.3, accompanied by a broad slowdown throughout the survey. The new-orders index slipped to 55.8 from 56.5 in January, while the employment index fell to 57.4 from 58. Meanwhile, the prices paid index fell to 65.5, relieving inflationary pressures.

US Treasuries stabilized at 4.37% after Monday’s 10 bps rise from 4.26%. A speech by Federal Reserve Bank of Philadelphia President Anthony Santomero hinting at further rate hikes had no cogent impact on currencies, but his words on the dollar were noted. Santomero said he expects the US trade deficit to stabilize this year this year partly due to a lower dollar. Santomero added “it seems that investors are becoming less willing to channel so much of their savings into additional dollar-denominated instruments going forward", and that: “some have suggested that they are beginning to diversify into other currencies, like the euro. This has caused the dollar to depreciate against other currencies."
Traders tomorrow turn to more speeches from the Fed, including Fed Chairman Greenspan’s testimony to the Congressional Budget Committee, where he is expected to focus on fiscal policy and social security rather than on monetary policy. Other speeches will be by Fed Governor Gramlich and San Francisco Fed President Yellen.

USDCAD gains as BoC holds

The US dollar gained a full cent to the 1.2440s after the Bank of Canada expectedly left interest rates unchanged 2.50%. The central bank said: “the implications for the pace of reduction in monetary stimulus are essentially unchanged from those that the Bank presented in January's Update” while hinting at the latest evidence of weak growth data to have justified the decision. With oil prices surging and the loonie some 8 cents off its lows, the possibility of another rate hike cannot be ruled out.

USDCAD faces resistance at 1.2450, but limited at 1.2470. USD bullishness ahead of Friday’s labor report might boost the currency beyond 1.25. Support starts at 1.2364, backed by 1.2330 and 1.2280—trend line support from 1.9144 low thru the 1.2774 low.

Yen regains strength after brief ditraction

The yen was dragged by the dollar to the high 104.60s in late morning NY trade before regaining composure towards the 104.30s. Strong household spending figures from Japan and hawkish talk by Bank of Japan Governor in Asian trade remained the underpinning boosts to the currency.

We still see USDJPY support holding around 104, backed up by major foundation at 103.70-- trend line from 101.66 low thru the 102.35 low. A drop below the 103.60-55 sees support at 103.15-20. Resistance starts at 104.65—38% retracement of 104.08-105.56 move. Accumulated bids seen capped at 105 and 105.55.

Euro drops below $1.32

Resurging growth concerns in the Eurozone and a flat PMI manufacturing survey at 51.9 further dragged the euro today as markets further discounted diminishing possibilities of an ECB rate hike this Spring. Yesterday, the European Commission’s indicator of economic sentiment in the Eurozone fell to 12-month low this month and below the 15-year average of 100.

Separately, Germany’s jobless rose by 161K to 4.88 million in February, reaching a new post-record high. The adjusted unemployment rate hit a 7-year high of 11.7%. Although this arguments lends to the growth paradigm of FX, the contrasts with the US growth differentials are widening.

EURUSD support seen starting at $1.3170, followed by $1.3120. Key foundation at 1.3089—38% retracement of the said move. Upside capped at 1.3250, followed by 1.3270, and 1.3310—61.8% retracement of the 1.3664-1.2730 drop.

9: 00 am Bank of Canada Interest Rate Decision (exp 2.50%, prev 2.50%) 10:00 am Feb ISM Manufacturing (exp 56.9, prev 56.4) 10:00 am Jan Construction Spending (exp 0.3%, prev 1.1%) 2:00 pm Philadelphia Fed's Santomero Speaks Reserve Bank of Australia Rate Decision (exp 5.25%, prev 5.25%)

The dollar is mixed in late morning European trade, gaining against the euro and sterling on a combination of weak UK data, renewed growth concerns and low inflation in the Eurozone, but weaker against the yen following monetary policy ramblings from Japan’s central bank governor (see details in respective currency pair sections).
This morning’s data highlight will be the Institute of Supply Management’s manufacturing activity index expected to have edged up by 0.5 points to 56.9 this month after dropping 0.9 points to 56.4 in January. Markets shall especially watch the ISM's new-orders and employment indices. Last month, the mew orders index fell 6.1 points to 56, while the employment index gained 4.8 points to 58.1. Bond markets will also watch for any rebound above the70 level in prices paid index, which fell by 3 points to 69 last month. but remained above the 50 figure for 35th consecutive month.

It appears that inflation is well under control according to yesterday’s PCE core price index showing a 1.6% rise. But yesterday’s back up in the 10-year yield by 10 bps to 4.36% may suggest some inflationary nervousness, even if the rise was largely seen caused by the break-up of Lebanon’s government as the country, signaling a fresh political upheaval following this month’s assignation of former PM Hariri. The move is seen as an important step in ridding Lebanon of the Syrian-backed regime and Syrians troops, which have stated their intentions of pulling out. A withdrawal of Syrian troops is a positive for the US dollar because it further allows freer reign for the US in the region and enables the US to isolate the Syrian regime.

The geopolitical reverberations have also emerged from Alleged Alqaeda operative AlZarkawi who reportedly claimed he was taking orders from Bin Laden to target oil plants in Iraq. Oil prices jhave stabilized around the $51.30 per barely from their above $52.20 last week despite continued forecasts for bad weather in the US and Europe.

Fukui boosts yen

The yen broadens its gains after Bank of Japan Governor Toshihiko Fukui sought to clarify that the Bank’s ultra easy monetary policy may be concluding soon. Fukui expressed concerns about the how “low interest rates over the long term have led to speculative demand in the housing market [in the US]”, thus warning about the potential repercussions of excessive continuation of easy monetary policy and continuously low long term rates.
The yen was already boosted in early Monday following the unexpectedly strong Industrial production and retail sales figures, which tempered concerns of a slowing Japanese economy. With foreigners continuing to be net buyers of Japanese stocks for the past 4 months, the currency’s future remains bright.

Dropping once again below the 100-day moving average, USDJPY, eyes interim support at 104, followed by key foundation at 103.70-- trend line from 101.66 low thru the 102.35 low. A drop below the 103.59 sees support at 103.15-20. Resistance starts at 104.65—38% retracement of 104.08-105.56 move. Accumulated bids seen capped at 105 and 105.55.

Euro adrift after flat PMI and growth concerns

Euro meanders just above the $1.32 level after its 70-pip drop in Tokyo trade in Monday. This morning’s purchasing managers' index for manufacturing came out flat at 51.9 this month, standing above the 50 level for the 17th straight month, albeit at a slower pace. But the talk of the market in Eurozone FX has been this morning’s Wall Street Journal piece featuring the “surprise economic slowdown in Germany and Italy last quarter” which is “helping push the European Central Bank to delay an interest-rate increase, underscoring concerns about when the recovery will kick in”. The article speculates that the ECB will reduce all chances for a near term rate hike when it meets this Thursday. Yet whether the Bank “trim its already-slim growth forecasts remains to be seen. Yesterday, the European Commission’s indicator of economic sentiment in the Eurozone fell to 12-month low this month and below the 15-year average of 100.

Separately, Germany’s jobless rose by 161K to 4.88 million in February, reaching a new post-record high. The adjusted unemployment rate hit a 7-year high of 11.7%. Chances of a spring rate hike were further quelled yesterday upon the release of consumer inflation, which slowed to 1.9% in the year ending in January from 2.4%, while core inflation slowed to 1.6% from December’s 1.9%.

Euro remains adrift at the $1.32 level, with support propped at $1.3170 and $1.3120. Key foundation at 1.3089—38% retracement of the said move. Resistance starts at 1.3250, followed by 1.3270, and 1.3310—61.8% retracement of the 1.3664-1.2730 drop.

CAD edges up, BoC Seen on hold

Loonie drags USD down below 1.2330s even as the Bank of Canada is expected to hold rates unchanged at 2.50%. Indeed, yesterday’s release of Q4 growth figures showing a weak 1.7% from 3.2% in Q3 is a good reason to hold steady. But we think the BoC has not yet ended its tightening campaign.

USDCAD support starts at 1.2320 backed by 1.2280—trend line support from 1.9144 low thru the 1.2774 low. Resistance starts at 1.24 followed by 1.2430.

Sterling’s steadies after weak data

UK’s purchasing managers' index for the manufacturing sector came in unchanged at 51.8 in February as did its Eurozone counterpart. But the CBI distributive trades survey edged up to a moribund -2 in February following January’s -3, disappointing estimates of a 7.0-8.0
Cable eyes resistance at $1.9225—the 61.8% retracement of the move from the $1.9254 high through the $1.9169 low. Next pressure point seen at $1.9245. Support starts at 1.92, backed by $1.9170.

RBA Seen holding Steady

We don’t expect the Reserve Bank of Australia to raise rates today (5.30 pm Tuesday) as it remains concerned with downside risks to growth. RBA Governor Macfarlane who surprised traders 2 weeks ago when he sounding off a relatively downbeat growth outlook but did leave the door open for a rate hike.

Support starts at 78.70, followed by 78.30 and 78. Any surprising decision to hike rates should send Aussie past the 79.30. A breach above the Nov 30 high of 79.44 sees pressure at 79.60.

US personal incomes tumbled 2.3% last month after surging by a record 3.7% in December, when the effect of a $3 dividend in per share in December skewed the data. The $32 billion stock dividend boosted personal incomes to their highest level in December before eroding them by the sharpest level in 11 years in January. Personal spending was flat in January after rising 0.8% in December, thanks largely to a 4.3% drop in durable-goods spending triggered by falling auto sales.

The core PCE price index rose 1.6% in the year ending in January from December’s 1.5% and above the 1.4% average since January 2003. But the figure remains well below the Fed’s tolerate maximum of 2.0%, implying no reason for the central banks.

The Purchasing Management Association of Chicago index of business activity rose to 62.7 in February from January’s 62.4 in January. The new orders index rose to a 4-month high of 68.5 from 65.8 in January. Also important is the rise in the employment index to a 3-month high of 57.7 from 52.8. The employment numbers, albeit at a regional level, suggest that forecasts of above 220K in Friday’s non-farm payrolls could be materialized.

US new home sales fell 9.2% last month 1.106 mln units from a revised 1.218 mln units.

US bond yields pushed higher on news a break-up in Lebanon’s government as the country ensues in a fresh political upheaval following this month’s assignation of former PM Hariri. The move is seen as a important step in throwing Syrian influence on Lebanon.

Markets turn to Eurozone manufacturing PMI, Canada’s central bank decision and the US ISM manufacturing survey.

Euro backs off earlier gains

The euro retraced most of the gains posted in Tokyo trade, losing nearly 50 pips off its 1.3275 high on a combination of low inflation data and the news on the break-up of Lebanon’s pro-Syria government. Eurozone inflation slowed to 1.9% in the year ending in January from 2.4%, while Core inflation slowed to 1.6% from December’s 1.9%.

Euro nears support at $1.32 level, followed by $1.3170 and $1.3120. Key support stands at 1.3089—38% retracement of the said move. Resistance starts at 1.3250, followed by 1.3270, and 1.3310—61.8% retracement of the 1.3664-1.2730 drop.

Yen holds on to most gains

The yen remained mostly steady is despite giving up a third of the 70-pip rally ensued in Tokyo Trade following the unexpectedly strong Industrial production and retail sales figures, which tempered concerns of a slowing Japanese economy. With foreigners continuing to be net buyers of Japanese stocks for the past 4 months, the yen remains well propped.

USDJPY faces resistance at 104.65—38% retracement of 104.08-105.56 move. Subsequent resistance follows at 105 and 105.55. Support seen at 104.27—50% retracement of the 101.66-106.84 move. Key foundation stands at 103.70-- trend line from 101.66 low thru the 102.35 low.

CAD shrugs sluggish GDP

The Loonie withstood a slowdown in Q4 growth to 1.7% from 3.2% thanks to a 0.9% drop in exports. Barring exports, however, GDP growth fared relatively well as far as consumer spending and business investment. The data, enforced expectations that tomorrow’s Bank of Canada rate decision will leave rates steady at 2.50%.

USDCAD made a late bounce towards the 1.2350s, just below the 38% retracement of the 1.2497-1.2247 drop. Key resistance stands at 1.2385—50% retracement of said move. Support starts at 12,330 backed by 1.2280s.

The dollar starts the week licking its wounds from last week’s sell-off, reminding traders of the diversification realities of global central banks. Losing about 50% of its beginning of year rally, the dollar will require renewed evidence of improved expansion in the US economy, especially on the employment front. But the renewed surge in oil prices and OPEC’s apparent approval with the latest rebound does not bode well for the dollar since it implies higher imports, deteriorating trade deficit and renewed risks for US consumers and businesses.

Friday’s February Labor report from the US will be the week’s main attraction as it is expected to show the creation of as many as 220K jobs, which could offer a key boost for the dollar. But such a high forecast could also mean a disappointment for the dollar if the figure comes in the 150Ks. The week’s other events are the PMI surveys on manufacturing and services from the US, Eurozone, UK and Canada. Wednesday’s testimony by Fed Chairman Greenspan on Congress’s budget committee will be scrutinized for any comments on monetary policy.

Dollar loses favor amid Speculators

FX futures speculators shifted away from the dollar as speculators increased their dollar shorts against the Aussie (new record), euro and sterling, while reducing their dollar shorts against the loonie and swissy. The yen was the sole exception as net shorts escalated to an11 month high.

Euro speculators fled into the euro last week when they became net long at 4,024 contracts, after 2 consecutive weeks in net short positions. Sterling bullishness remained unhinged when net longs rose 13% to 25,156 contracts, the highest since December. Note that sterling speculators had consistently remained net long since mid October. Aussie net longs rose 26% to 45,970 contracts, pushing to a new all time high in net longs territory amid sustained expectations of a rate hike. Yen bearishness took a turn to the worst when net shorts rose 10% to 25,936 contracts, the highest since March of last year. CHF net shorts fell 60% to 3,450 contracts, remaining in net bearishness for 6 consecutive weeks. CAD net shorts stabilized by 41% to 3,141 contracts, posting their 3rd straight week in the red.

Yen rallies on sales, industrial output

The yen is up more than 70 pips after Industrial production rise grew 2.1% last month, defying expectations of a 1.5% rise, while retail sales jumped 5.7%. The data tempered concerns on Japan’s economy after Q4 GDP fell 0.5%, showing three consecutive quarterly declines. But with foreigners continuing to be net buyers of Japanese stocks for the past 4 months, the yen remains well propped.

USDJPY falls below 105, faces interim support at 104.60, followed by 104.27—50% retracement of the 101.66-106.84 move. Key foundation stands at 103.70-- trend line from 101.66 low thru the 102.35 low. Resistance starts at 105.70, followed by 106 and 106.30.

Euro eyes 1.33

Euro turns to Monday’s CPI report expected to have slowed to 2.0% from 2.4% last month. The week’s PMI figures are also expected to have slipped slip back. Downward pressure on the euro could also ensue ahead of Friday’s labor report. Euro faces upside resistance at 1.3250, followed by 1.3270, and 1.3310—61.8% retracement of the 1.3664-1.2730 drop. Support starts at $1.32 level, backed by $1.3170 and $1.3120. Key support stands at 1.3089—38% retracement of the said move.

Aussie awaits RBA

This week’s decision by the Reserve Bank of Australia will be the focal point fo the rallying Aussie as traders expect a rate hike in the near term, but probably not this week ad the bank remains concerned with downside risks to growth. RBA Governor Macfarlane who surprised traders 2 weeks ago when he sounding off a relatively donwnbeat growth outlook but did leave the door open for a rate hike.

Hovering around 79 cents, Aussie faces key resistance at 79.30. A breach above the Nov 30 high of 79.44 sees pressure at 79.60. Support starts at 78.30, followed by 77.80 and 77.40.