The dollar finished the week on a high note against the euro and the yen for the first time in 4 weeks as traders eroded those current-account deficit induced losses on Wednesday in 4 weeks and began to take profits and square positions ahead of next week’s FOMC meeting. Next Tuesday, the Fed is set to make its 7th rate hike of the current tightening campaign, lifting its fed funds rate by 25 bps to 2.75% next Tuesday. We expect the FOMC to add a reference to oil in next week's FOMC statement (as it did last summer) with the implication that it is "watching inflation closely". That should arouse bond markets into expecting faster rate hikes (as seen in Beige Book) and could help the dollar in the short-term. We do NOT think the Fed will accelerate its rate hikes. But the mere notion of traders expecting faster rate hikes in order to contain inflation rather than stronger growth is a clear negative for the dollar, especially when higher oil is synonymous to higher imports i.e. deteriorating trade deficit.

EURUSD drops another cent

The dollar rally ahead of next week’s anticipated rate hike intensified traders to drag down the euro past the $1.3310 support--the 61.8% retracement of the climb from the $1.2730-1.3277 climb. Interim support lies at 1.33—the trend line support extending from the $1.2735 low thru the $1.3087 low. We see accumulated losses extending to 1.3270, backed by $1.3245. Resistance capped at $1.3335, followed by $1.3385. $1.3420 remains key short term resistance, followed by $1.3470.

USDCAD breaches below 1.2050 support

USDCAD fell below the key 1.2050 support, which is just near the 61.8% retracement of the 1.1715 - 1.2581 rally. Bank of Canada Deputy Governor David Longworth said today he expects the recent strengthening of the Canadian dollar has dampened export growth and boosted imports, and he expects core inflation to return to 2.0% by end of next year. He sees reduced near-term risks to the global economy, but sees remaining risks from oil prices and Chinese growth. We note that last Friday’s remarks by Bank of Canada Governor David Dodge acknowledging that interest rates will have to rise in the "foreseeable future" should not be interpreted as a hint to an imminent rate hike.
Support follows at 1.20 followed by 1.1950. Upside seen capped at 1.2050, followed by 1.2130.

Cable off $1.9120 low

Cable tested the bottom of its 1 ½ week range at 1.9120 before settling back to the $1.92. Resistance seen forming at the $1.9230 and 1.9260. Support starts at $1.9160, followed by 1.91.

The US currency stabilized from its losses following this yesterday’s current account damage. Mixed economic coupled with new highs in oil at $57.60 per barrel did not prevent the dollar from edging modest gains as some analysts reason the sell-of was over done. Markets may start further bidding up the dollar ahead of next week’s FOMC meeting, which is likely to produce the 7th rate hike since June 2004.

The US Index of leading economic indicators rose 0.1% in February from a 0.3% drop in January. Five of the ten indicators making up the leading index increased in February. The positive contributors – starting from the largest positive contributor - were weekly jobless claims, stock prices, real money supply, vendor performance, and manufacturers' new orders for consumer goods and materials. The negative contributors - beginning with the largest negative contributor - were average weekly manufacturing hours, interest rate spread, building permits, and index of consumer expectations. The manufacturers' new orders for nondefense capital goods were unchanged.

The Philadelphia Fed Index dropped to a 20-month low of 11.4 in March from 23.9, with a decline in the employment Index drops to 10.1 from 12.3, while the prices paid index fell to 29.7 from 43.5. The new orders index rose 1.5 point to 13.2

Weekly jobless claims fell 10K to 318K, while the 4 week average rose 3.75K to 316.5K, the highest in 6 weeks. US treasuries rallied following the soft Philly Fed index as the 10-year yield fell to 4.45% from 4.51%

EURUSD slips below $1.34

The euro’s declines below the $1.34 figure were a result of trader’s profit-taking, drifting towards the $1.3370s. Support starts at $1.3340 followed by $1.3310-- the 61.8% retracement of the climb from the year’s low of $1.2730 to the $1.3277 high. Key foundation stands at $1.3270. Resistance starts at capped at $1.3420 resistance, followed by $1.3470, which is the trend line resistance extending from the all time high of $1.3664 through the $1.3480 high.

USDCAD breaches below 1.2050 support

USDCAD fell below the key 1.2050 support, which is just near the 61.8% retracement of the 1.1715 - 1.2581 rally. Bank of Canada Deputy Governor David Longworth said today he expects the recent strengthening of the Canadian dollar has dampened export growth and boosted imports, and he expects core inflation to return to 2.0% by end of next year. He sees reduced near-term risks to the global economy, but sees remaining risks from oil prices and Chinese growth. We note that last Friday’s remarks by Bank of Canada Governor David Dodge acknowledging that interest rates will have to rise in the "foreseeable future" should not be interpreted as a hint to an imminent rate hike.

Support follows at 1.20 followed by 1.1950. Upside seen capped at 1.2050, followed by 1.2130.

Yen adrift after Korean talk

The eyen edged lower as the dollar was helped by profit-taking. There was little market impact from North Korean Central News agency accusations that the US was moving its military exercises with South Korea into a ''real war'' phase by sending the aircraft carrier USS Kitty Hawk into the region. The news report said: “the US has always dispatched a carrier flotilla to waters off a certain country before launching a war of aggression.''
Resistance starts at 104.80, followed by 105.30. Support still looms at 104, backed by key support at 103.67.

The dollar tumbled across the board as the Q4 current account deficit reached a record high, bringing forth the external imbalance of the US economy to the minds of traders. The US current account deficit rose 13% to $187.9 bln in Q4, while hitting a record $665.5 billion in 2004, accounting for 5.7% of GDP. The deficit of goods and services increased to $171.1 billion from $155.9 billion in the third as imports grew twice as much as exports. But the state of capital flows was relatively stable. US owned assets abroad rose $276.5 billion in Q4 after an increase of $127.6 billion in Q3. Foreign-owned assets in the US increased $460.2 billion in, following an increase of $256.3 billion in the third. Net foreign purchases of US securities other than U.S. Treasury securities were a record $170.2 billion in the fourth quarter, up sharply from $93.0 billion in Q3.

Oil prices hit an all time high at $56.47 despite OPEC’s decision increase production by 500K barrels a day as of April 1. OPEC said they would also consider hiking output the following month. But analysts were not too impressed as they deem planned supply hikes not keeping up with rising demand and limited supplies.
Separately, US industrial production rose 0.3% last month following a revised 0.1% increase. Capacity Utilization rose to 79.4%, reaching its highest in more than 4 years.

EURUSD works its way to $1.3450

The euro wasted no chance to cheer the current account deterioration in the US, knifing through the $1.34 figure. The consensus amid currency traders has long established what we postulated, namely that yesterday’; release of the TICS data was largely driven by unsustainable and non-durable hedge fund flows. While we cannot argue against the flows into US equities, we deem the injection into treasuries to dissipate in subsequent months.
Traders await tomorrow’s release of industrial production figures from the Eurozone, expected up1.3% in the year ending in January following a 0.5% rise.

EURUSD breached the $1.3420 resistance, reaching a $1.3438 high. We see key resistance at $1.3470, which is the trend line resistance extending from the all time high of $1.3664 through the $1.3480 high. Subsequent resistance stands at $1.3530. Support starts at $1.3370, followed by $1.3340 and $1.3310-- the 61.8% retracement of the climb from the year’s low of $1.2730 to the $1.3277 high.

Yen drifts at bottom of range

The yen edged higher, dragging the dollar to the low 104s, but the upside moves paled in comparison to European FX. Japanese policy makers are consciously attempting to preserve the 103.70-104 support since a breach below it could drive down the bottom to faster slides. Yesterday’s, TICS report affirmed the fact that Japanese purchases of US treasuries were falling, as these dropped 1.4% to $702 billion in January, showing the fourth monthly decline over the past 5 months on record and confirming that the biggest holder of US treasuries is indeed reducing its exposure to the depreciating currency.
The story continues with the support at 104 figure, followed by the 103.80 trend line. Key foundation still remains at 103.60. Resistance starts at 104.30, followed by 104.80.

Cable attempts bullish flag

Cable settled near the high of its 1 ½ week range testing the 1.93 level amid the dollar’s broad sell-off. But there were no good news when the UK Budget statement, aimed at “modest fiscal tightening” in 2005-06, which could mean that tighter fiscal policy could allow the Bank of England to hold off from any subsequent tightening of monetary policy, which could reducing the yield luster for sterling.

Resistance seen forming at the $1.93 figure, followed by $1.9335 and $1.9350. Support starts at $1.92, followed by 1.9160.

8:30 am US Q4 Current Account (exp -$180 bln, prev -$164.7 bln) 9:15 am US Feb Industrial Production (exp 0.4%, prev 0.0%) US Feb Capacity Utilization (exp 79.2%, prev 79.0 %)

Market is weighing on the dollar out of concern ahead of this morning’s release of Q4 current account figures from the US, which are expected to show a $180 bln deficit after a smaller than expected $164.4 bln in Q3. The Q3 figure was a result of bigger than expected foreign deficit investment flows into the US. Some forecasts expect the figure to surge as high as $190 bln, which would make up a record 5.6% of GDP. Although the US drew $91.5bn worth of net capital flows in January, the second highest ever, the bulk of that increase was accounted for by hedge funds’ money going into Treasuries. Considering that Treasuries have fallen ever since, there’s a strong likelihood that flows may have reversed.

Oil prices are falling after OPEC announced today at its meeting it will increase production by 500K barrels a day as of April 1, and consider hiking output the following month. This would be the fourth supply hike in less than a year, but is making little difference from preventing crude prices from to regain the record highs. Crude prices are down some 50 cents to $54.57 a barrel on the New York Mercantile Exchange, after reaching as much as $55.45 a barrel yesterday. But many analysts remain bullish, expecting fresh record highs in prices as the planned supply hikes are seen not keeping up with rising demand and limited supplies.

EURUSD retraces 50% of week’s drop

Euro muscles ahead with nearly a full cent gain, erasing Tuesday’s losses in anticipation of the US current account figures. Euro could test the $1.3420 high in the event that the figure reaches at least $180 billion. A figure under $170 bln could be dollar supportive. Traders must also watch the industrial production figures, which could boost the euro if the report shows less than a 0.2% rise.


EURUSD resistance seen at key $1.3420, followed by the $1.3480. Support stands at $1.3340 and $1.3310-- the 61.8% retracement of the climb from the year’s low of $1.2730 to the $1.3277 high.

USDJPY back towards 104

The dollar is back down against the yen as traders have had a chance to further mull Japan’s continued fall in holdings of US treasuries, as shown in the January TICS data, showing the fourth monthly decline over the past 5 months on record. Not only the January holdings were the lowest in 6 months, but it is the first time in 4 years in which Japanese holdings registered such frequency of monthly declines in a concentrated period of time. This suggests that Japanese authorities are indeed lightening their hand of US assets. This confirms our long established analysis that Japan is starting to reduce its exposure of US bonds.

USDJPY is back towards 104 figure, facing the 103.80 trend line support. Key support remains at 103.60, a breach below which calls 103.30. Resistance starts at 104.30, followed by 104.70.

Cable erases Tuesday loses

Cable is up after unemployment rose by a smaller than expected 700 last month, while the unemployment rate remained unchanged at 4.4%. Sterling is also helped by expectations that UK Chancellor Gordon Brown could introduce a 50-year bond in today’s scheduled Budget address.

Cable rallies a full cent towards the $1.9240s, facing interim resistance at minor trend line of $1.9250. A breach beyond $1.9280 resistance seen capped at the March 8 high of $1.9320. Support holds at $1.92, followed by 1.9160.

The dollar climbed across the board after a report from the US Treasury showing net foreign capital flows into the US assets soaring 51% to $91.5 billion in January—the second highest on record. The figure was a clear positive for the dollar as it covered 1.5 times the $58 billion January trade deficit thanks to a 268% increase into US treasuries at $30.7 billion--the highest since June 2004. 94% of that increase emerged from private accounts, the majority of which are hedge funds. Net foreign purchases of US equities soared 124% to $16.5 billion, the highest since May 2001.

SEE LATEST ARTICLES & IDEAS FOR MORE ANALYSIS ON THE REPORT
The comments from Saudi Arabia’s oil Minister Al-Naimi stating the intention to ”convince'' the rest of OPEC on a production hike by 500K barrels a day ahead of this week’s OPEC meeting did not have a lasting effect on oil prices. Although Kuwait concurred with the Saudi remark, several other members many expressed their inability to further raise output. Oil drifted down to $54.94 before regaining the 55.00 level.

US retail sales rose 0.5% in February following an upward revision of a 0.3% rise from a previously reported 0.3% decrease. Retail Sales excluding autos rose 0.4% from a 0.6% rise.

Yen drops on capital flows, but Japan’s reduces holdings

Despite the overall jump in net foreign capital flows of US assets, Japanese purchases of US treasuries fell 1.4% to $702 billion in January, showing the fourth monthly decline over the past 5 months on record and confirming that the biggest holder of US treasuries is indeed reducing its exposure to the depreciating currency. Not only the January holdings are the lowest in 6 months, but it is the first time in 4 years in which Japanese holdings registered such frequency of monthly declines in a concentrated period of time. This suggests that Japanese authorities are indeed lightening their hand of US assets.
After reaching the 104.60, USDJPY drifts towards the 104 figure, followed by 103.80 trend line support. Key support remains at 103.60. Resistance starts at 105 trend line resistance followed by 105.70 trend line resistance extending from the Sep high of 111.70 thru the Feb high of 106.84 high.

EURUSD drops to $1.33

The euro was dealt its second daily loss overwhelmed by the strong capital flows report. Despite the concentration accounts, traders stuck with the dollar longs. The euro made an 180 degree turn from earlier gains initiated by a 6-month high in Germany’s ZEW survey of investor confidence this month. Higher exports, improved industrial production and retail sales helped overcome the nation’s slump seen in Q4.

Euro support starts at $1.3310--the 61.8% retracement of the climb from the year’s low of $1.2730 to the $1.3277 high. A breach below $1.33 sees support at $1.3270 and $1.3190. Upside capped at $1.3350, followed by 1.3380 and $1.3420.

Cable drifts near $1.91

Sterling’s took back its earlier gains following the US TICS data. Sterling was initially propped by better than expected data on Britain's closely-watched housing market. British house prices fell in the three months to February but at the weakest pace in five months, the Royal Institution of Chartered Surveyors’ house price balance for January edged up to -36 from -38. Although that was the 6th straight negative month, the rise helped fuel expectations of a bottoming in prices. Sterling traders shift to Wednesday’s release of unemployment data and Thursday’s February retail sales figures. On the policy front, the market awaits Chancellor Gordon Brown’s annual budget which is expected to be relatively restricted. Markets expect the Bank of England to raise rates in Q2 by 25 bps to 5.00%.

Accumulate looses see support at $1.91, followed by $1.9050. Key support holds at $1.9011—the 38% retracement of the $1.8507-1.9324 upmove. Upside capped at 1.9160, and 1.9220.

8:30 am Feb Retail Sales (exp 0.6%, prev -0.3%) Feb Retail Sales - ex autos (exp 0.8%, 0.6%) Mar Empire Manufacturing Survey (exp 19.45, prev 19.19) 9:00 am Jan TICS Flows (exp $48 bln, prev -$61.3 bnl) Jan Business Inventories (exp 0.8%, prev 0.2%)

USD Edges Lower on ZEW, Awaits TICS Flows

The dollar pushes lower after against the European FX after Germany’s ZEW survey of investor confidence hit a 6-month high in March it gained to 36.3 from February's 35.9, beating consensus expectations of a 35 reading. Higher exports, improved industrial production and retail sales helped overcome the nation’s slump seen in Q4.

Aside to this morning’s retail sales figures from the US at 8:30 am, currency traders especially await the January TICS report (9:00 am) from the US Treasury, expected to show net capital flows to have come as low as $45-48 billion in January-- well below the January trade gap of $58.3 billion. Recall the December TICS report showed a 31% decline to $61.3 billion, reflecting a 75% slump in net foreign purchases of US treasuries, a 51% drop in inflows into US equities and an 81% surge in net US purchases of foreign stocks. A figure below $55 billion would be dollar negative. Interestingly, foreign interest in the January auctions of the 5-year T-note, 10-yeat TIP and 2-year note fell to 39%, 36% and 29% respectively, from as high as 40-50% in prior months. Considering this gloomy reality for Treasuries and the 3% drop in the S&P;, we could see the TICs report show a figure as low as $45-48 billion—well below the January trade gap.

Saudi Arabia’s oil Minister Al-Naimi reiterated his intention to ”convince'' the rest of OPEC to accept his proposal to increase oil production by 500K barrels a day, to avert further price surges. Kuwait’s oil Minister has confirmed Al Naimi’s comments. Oil drifts down to $54.94 per barrel.

EURUSD awaits next chance to break 1.34

Euro gained nearly half a cent towards the $1.34 level after the ZEW survey but is now drifting around the $1.3370s. EURUSD faces support at at $1.3340 and $1.3310-- the 61.8% retracement of the climb from the year’s low of $1.2730 to the $1.3277 high. Initial resistance starts at $1.3420, followed by the $1.3480 barrier ahead of a potential deterioration in the TICS report such as a figure below $55 billion.

USDJPY accelerates losses

USDJPY loses about 70 pips from its 104.98 high of the European session, giving more than 50% of its gains from Monday trade. The pair is testing its wedge with initial support at 104, backed by the 103.80 trend line support. Key support remains at 103.60. Resistance starts at 105 trend line resistance followed by 105.70 trend line resistance extending from the Sep high of 111.70 thru the Feb high of 106.84 high.

Cable gains full cent at $1.92

Cable gains a full cent to $1.9225, eyeing key resistance at $1.9270 and $1.9330. Support starts at 1.9160, backed by $1.90.

USDCAD still flirts with 1.20 support

USDCAD drifts around the 1.2050 support—which is the 61.8% retracement of the 1.1715 - 1.2581 rally. Support follows at 1.20 followed by 1.1950. Upside seen capped at 1.2120, followed by 1.2160.