A combination of central banker remarks, rising oil and trade deficit concerns conspired to send the dollar to 13-month lows against the Aussie, 2-month lows against the euro and 2 ½ month lows against the pound. Oil prices pushed to $54.57 per barrel as snowstorms in the North East of the US brought back concerns of surging demand at the expense of outstripped supplies. Fed Governor Ben Bernanke did not make things easier on the dollar when he said the neutral Fed Funds Rate level may be somewhat lower today than in past, thus possibly reducing the possibility of a protracted hike in interest rates.

US Treasuries sold off as the 10-year yield spiked to 4.38% from 4.31% as traders worried about inflationary pressures from surging commodity prices and a falling dollar. Prices of copper reached hit a 16-year high, while the Reuters-CRB Index of 17 commodities pushed to its highest level since January 1981.

Aussie hits 13-month high

The Aussie extended its European session gains pushing to 79.87 cents amid accumulating concerns of persistently high oil prices and renewed chances of a tightening by the Reserve Bank of Australia. With Aussie rates already at a high of 5.50%, traders have more reasons to seek refuge in the higher yielding currencies aside from solely the commodity argument. Aussie also hit a 12-month high against the yen at 83.50 cents, while the New Zealand dollar surged to 22 ½ month highs against the USD.

A breach above 79.60 sees pressure at 79.85 followed by extreme pressure at 80.10. Support starts at 79.30, followed by 79 and 78.62—50% retracement of the drop from the 79.57 high to the 77.70 low.

USDJPY tests 7-week trend line support

Despite the negative impact of rising oil on Japan and its economy, the yen dragged the dollar under the 104.50 yen figure. Persistent net purchases of Japanese stocks by foreigners hit the 19th straight week, while the Nikkei finally broke a 9-day winning streak.

In a little noted report over the weekend, the Bank of International Settlements found Asian banks to have reduced the share of deposits held in US dollars in favor of other currencies like the euro to 67% in September 2004 from 81% in 2001. Any indication of Asian banks lightning their hands off US dollars, helps the Japanese yen, at the expense of the dollar.

USDJPY faces support at 104.32, the trend line support from the 101.66 low. A breach below 104.20, sees support at 103.80. Resistance stands at 105.35, followed by 105.50—the 38% retracement of the fall from the 111.73 high thru the 101.66 low.

Euro hits 2-month highs

A surprisingly hawkish comment from European Central Bank Council member Nout Wellink initiated the euro’s climb past the $1.33 figure before allowing traders to intensify the rally on renewed trade deficit concerns in the US. Wellink’s comments hinting indicating that interest rates were very low were especially surprising considering the fact that inflation slowed to 1.9%, below the central bank’s preferred ceiling of 2.0%.

EURSD broke above the key resistance of $1.3310—the 61.8% retracement of the climb from the year’s low of $1.2730 to the $1.3277 high. Pressure called up at 1.3360, followed by 1.34. Support stands at 1.3240, followed by 1.3180.

The dollar fell across the board in a vacuum of data releases amid some bearish comments made by economists regarding the world economy in light of rallying oil prices and the comments from OPEC officials calling $80 pb oil a possibility in case of disruption to supplies. Although US crude prices are off yesterday’s 4-month high of $53.92 per barrel, traders are increasingly talking of $60 oil as early as this month. Today’s murder of an Iraqi Interior Ministry official was claimed by Al-Qaeda may also maintain oil prices supported as it further highlights the destabilizing forces to oil and order.

Traders are also lightening their hand off dollars ahead of Friday’s trade figures from the US, which could show a bounce in imports and a renewed rise in the trade imbalance at $59 billion in January, nearing a record high. Higher oil imports are once again seen as the catalyst.

Aussie breaches 79.60

Concerns of persistently high oil prices in the US combined with renewed chances of a tightening by the Reserve Bank of Australia, fuel the Aussie past the 79.50 resistance to 79.68 high, the highest since February 2004. Wednesday evening’s (NY Time) employment figures are expected to show the unemployment rate up at 5.2% from 5.1% with the payrolls flat. Any surprising dip in the jobless rate could trigger the Aussie past the 79.50 cent high.

A breach above 79.60 sees pressure at 79.85 followed by extreme pressure at 80.10. Support starts at 79.30, followed by 79 and 78.62—50% retracement of the drop from the 79.57 high to the 77.70 low.

USDJPY testing 104.70s

Japan’s Nikkei index broke a 9-day winning streak, after closing at 11,886.91its highest level sine April of last year. Foreign investors continued to be net buyers of Japanese shares, sustaining inflows or for the 19th straight week.

USDJPY drifts towards the 104.80s, nearing the 104.70s support which is the trend line extending from the Jan 17 low. Subsequent support comes up at 104.24—50% retracement of the rally from the 101.66 low to the 106.84 high. Resistance stands at 105.35, followed by 105.50—the 38% retracement of the fall from the 111.73 high thru the 101.66 low.

Euro regains $1.3250 on hawkish Wellink

Euro pushed back up towards the $1.3250s amid hawkish comments European Central Bank Council member Nout Wellink’s indications of an eventual rate hike to avert inflation from “extremely low interest rates''. The comments, made to the Financial Times, came in despite recent indications of slower Eurozone growth and a slowdown in CPI inflation back under the central bank’s 2.00% limit.

EURSD resistance lifts up to $1.3250s, followed by $1.3280. Key resistance stands at $1.3310—the 61.8% retracement of the climb from the year’s low of $1.2730 to the $1.3277 high. Subsequent resistance stands at 1.3340. Support starts at 1.32, followed by 1.3160.

Cable rises despite sluggish sales

Cable joined the selling of the dollar despite a 0.3% drop in retail sales last month. Year- on-year sales rose 2.9% on a year to year basis. The 3-month trend fell -0.1%, the same as in January. The British Retail Commission cited “consumers' concern about interest rates, the housing market and taxes”. Traders have opened the door for a bank of England rate hike in upcoming months after the MPC discussed a tightening last month. Thursday’s rate decision, however, is seen keeping rates at 4.75%.

Cable holds under at $1.9240, with support cropping up to $1.92 and $1.9130. Upside capped at $1.9250, followed by 1.9287 and 1.9330.

The dollar edged up modestly in a quiet trading session when markets’ emphasis fell on rallying US and world bourses, which powered to 3 ½ year highs amid prospects of a recovering world economy and tame inflation. Friday’s labor report showing a 262K rise in jobs may have not been sufficient for the dollar, but the fact that it was the highest in 4 months along with stable average hourly earnings calmed fears of accelerated rate hikes. The rally in equities was unfazed by renewed gains in oil, which saw US WTI crude hit a fresh 4-month high at $53.92 per barrel.

USDJPY struggles atop 105

The 8th consecutive daily gain lifting Tokyo’s Nikkei to a 11-month high did not prevent the yen from retreating against the dollar after Bank of Japan Governor Hayami said his country had no intention of diversifying its FX reserves, adding to the chorus of denial from Asia after Korea roiled currency markets with its diversification statement. With $840 in fx reserves and a record $711 billion in US Treasuries, Japan is too careful to cause a sharp dollar decline and disrupt its mountain of dollar reserves. But with Japan having already eased from its purchases of US treasuries for the first time in 3 years in light of the dollars decline, traders should expect further gradual retreat in Treasury holdings to reduce its exposure to US dollars.

USDJPY support starts at the 104.70s, backed by 104.25. Upside pressure seen initiated at 105.35, followed by 105.50—the 38% retracement of the fall from the 111.73 high thru the 101.66 low. Subsequent resistance stands at 105.80 and 106.18.

Euro meanders but still holds

Although the euro lost some of its Friday luster, backing off some half a cent from its $1.3255 high, traders have yet to decline how to play Eurozone’s growth concerns against the dollar’s trade deficit concerns, which will be scrutinized later this week amid the January trade figures due on Friday concerns.

EURSD sees interim resistance at $1.3250s, followed by $1.3280. Key resistance stands at $1.3310—the 61.8% retracement of the climb from the year’s low of $1.2730 to the $1.3277 high. Subsequent resistance stands at 1.3340. Support starts at 1.32, followed by 1.3160.

Another Aussie rate hike still in the works

Although last week’s rate hike was widely seen as the last following the prior week’s downbeat remarks on growth from the Reserve Bank of Australia, traders are still on the look out for data clues on further tightening. Wednesday evening’s employment figures are expected to show the unemployment rate up at 5.2% from 5.1% with the payrolls flat. Any surprising dip in the jobless rate could trigger the Aussie past the 79.50 cent high.

Interim resistance stands at 79.30, followed by 79.60. Support seen starting at 78.80, followed by 78.62—50%
retracement of the drop from the 79.57 high to the 77.70 low. Key support stands at 78.20.

Cable struggles under $1.9150

Cable hovers around the 61.8% resistance of the $1.9549-$1.8510 drop at 1.9150, facing interim support at $1.9080. Subsequent support follows at the 50% retracement of the said move at $1.9030. Accumulate losses seen supported at $1.8960. Upside starts at $1.9160, followed by 1.92.

Dollar starts the week near on a weak footing following Friday’s lows after a broad sell-off following the release of non-farm payrolls, which came in less than the 300K forecasts informally anticipated. Traders aren’t likely to rush back into the dollar ahead of Friday’s trade figures from the US, which could show a bounce in imports and a renewed rise in the

US trade deficit

Billionaire investor Warren Buffett reiterated his short position against the US dollar in his closely watched letter to shareholders writing: “There are deep-rooted structural problems that will cause America to continue to run a huge current-account deficit unless trade policies either change materially or the dollar declines by a degree that could prove unsettling to financial markets''. Buffett reiterated that those concerns took precedence over stood the US’ relative growth advantage. Buffett’s bet against the dollar nearly doubled over the year to $21.4bn, generating $1.8 billion in gains as the currency fell across the board.

Dollar loses favor from speculators

FX speculators moved further away from the dollar as dollar shorts hit record highs against the Aussie and sterling, while soaring against the euro. Euro net longs soared 731% to 33,418 contracts, the highest since November, while sterling bullishness rose 33% to a new high of 33,519 contracts. Aussie net longs hit a fresh record high gaining 20% to 55 379 contracts, despite the drop in the Aussie following the RBA rate hike which reduced chances of further subsequent tightening. CHF net shorts fell 45% to 1,903 contracts, staying in net selling position for the 7th straight week. But net shorts have been easing for the third straight week. Yen bearishness diminished drastically as net shorts fell 73% to 7,123 contracts. CAD net shorts soared 117% to a 4-week high of 6,829 contracts.
Euro looks to break 1.33

Despite the Eurozone deteriorating growth concerns, the currency has the chance to breach past the $1.33 figure amid renewed concern with the US trade deficit and the dollar’s failure to rally to the US jobs report.

Hovering around the $1.3250s, EURUSD faces interim resistance at $1.3270, followed by $1.3310—the 61.8% retracement of the euro’s gain from its year’s low of $1.2730 to the 1.3277 high. Subsequent resistance stands at 1.3340. Support starts at 1.32, followed by 1.3160.

Yen withstand oil rally

The yen’s rally, especially against the dollar, highlighted the currency’s ability to withstand Japan’s dependence on imported oil and exploiting the dollar’s setback. It took 3 days for the dollar to gain towards a 2-week high at 105.58 before erasing all those gains in 3 hours. Meanwhile, the Nikkei had closed up for the 7th consecutive day reflecting stepped up foreign purchases of Japanese stocks.

Aussie retains 79 cents

Aussie faces resistance at 79.30, followed by 79.60. Support seen starting at 78.80, followed by 78.62—50% retracement of the drop from the 79.57 high to the 77.70 low. Key support stands at 78.20.

US non-farm payrolls rose 262,000 in February from a revised 132,000 reading in January, while the unemployment rate rose to 5.4% and average hourly earnings grew 0.3% from 0.2%. The payrolls followed an aggregate downward revision of 7,000 jobs in December and January.

The payrolls figure overshot our expectations of a 170K rise due to unexpectedly broad job creation, even in the manufacturing sector, which produced its first net increase of jobs since August.

The household survey, which determines the unemployment rate, showed the number of employed falling by 97,000 and those categorized as unemployed rising by 251,000, hence producing the 0.2% increase to 5.4%.

Services still promising

Payrolls in services industries added 207,000 jobs in February, the highest level in 4 month. Professional and business services lead the sector with 81,000 jobs, within which 30,000 were temporary help services. Health care and social assistance industries continued to lead with 35,000 jobs, bringing the 12-month total to 258,000. Retail jobs generated 29,600 jobs after a 30,000 increase in January.

As a percentage of total payrolls, manufacturing jobs have accounted for 79%, just below the 88% monthly average since January 2004. This suggests a clear broadening in the creation of jobs from other sectors such as manufacturing and construction (see below). In order for this to continue, the US economy must make the essential transition of creating jobs for new entrants rather than stabilizing layoffs.

Manufacturing finally stages sharp bounce

Manufacturing finally entered positive territory with the creation of 20,000 jobs, following 5 consecutive monthly declines. Returning auto workers accounted for half of the job gains following larger than usual temporary layoff in January. Manufacturing netted the creation of 51,000 jobs since February 2003.

Looking ahead, however, it appears doubtful whether companies--apart from auto industries--will continue hiring amid higher oil costs. And with productivity appearing to have peaked, companies may continue holding off from hiring.

The volatility in construction jobs contributed to the complication in predictions after the January figure was revised upwards to flat from an initial decline of 9,000. The 30,000 increase in February followed “unusually severe weather conditions” in January. The bulk of jobs increase emanated from trade contractors (16,000) and residential builders (5,000).

Unusual reaction in dollar and bonds

The sell off in the dollar and the rally in Treasuries were best explained by the emergence of “whisper” expectations of as much as 300K in Thursday. There was constant reference to low weekly jobless claims. Indeed, the 4-week average figures totaled 1.24 million in February, the lowest in 4 ½ years. The broad increase in both of the ISM employment indices continued to show expansion, specifically in services. This boosted “unofficial” forecasts to as high as 300K, hence the disappointing reaction. The 262,000 number was clearly above estimates of 220,000 and the highest in 4 months.

We cannot exactly attribute the dollar’s selloff in the face of the strong report to an emerging dollar weakness mainly because of the rally in the Treasuries, whose 10-year yield slipped to 4.31% from 4.37%. It would have been more of an anomaly if treasuries sold off and the dollar declined. Today’s market reaction means that traders deemed the report to be lacking sufficient strength reflected in the various employment-related data of the past 4 weeks.

Barring the element of expectations--which was mainly instrumental in the market reaction-- today’s nonfarm payrolls clearly support the Fed’s intentions to raise interest rates back towards 3.00% by late summer. But we expect the dollar’s outlook to continue hinging on the trade deficit and the extent of its widening as well as the financing pace from foreign capital flows.