The dollar eased off its highs in lackluster trading in a day when Fed Chairman Greenspan sounded like an oil analyst rather than a central banker. His much awaited speech on energy had no impact on currencies as it avoided giving his assessment on the expected inflationary effect of rising energy prices or a contractionary impact on the economy.

The PMI services surveys from the UK and Eurozone avoided another bad report when the former showed an improvement and the latter came out flat. Strong housing numbers from the UK also helped support the pound.

Euro’s wobbles near $1.28

Eurozone PMI came in flat at 53.0 last month, suggesting very little improvement over the last 3 months, which qualifies the sector to be in near a state of stagnation. Yesterdays growth downgrade by the EU Commission and the Germany’s IFO survey hitting an 18-month low is giving very little to write home about as far as Eurozone growth, but escalating oil prices in the US coupled with a tightening Fed policy may not bode well for US growth prospects.

EURUSD pushed back up to the $1.2850s from a $1.28 session low. A breach above $1.2875, sees strong resistance at $1.2945-50, followed by 1.2980. Accumulated selling seen extending to the key foundation at $1.2770—the 200-day moving average.

Sterling shored up by housing, PMI

Cable pushed higher on a combination of a 2-point rise in UK March service PMI to 57, and a 9.7% year on year rise in the Halifax house price index. Although this was the first time the index has risen less than 10% in annual terms since November 2001, the figure was regarded to reflect stability than weakness. As for the PMI, the report was showed growth for the 24th straight month, and at a much stronger pace than in previous months, which could draw the attention of more hawkish opinions by the Bank of England’s MPC when it meets tomorrow for its 2 day meeting. Rates are widely expected to be held unchanged at 4.75%, but the probability of a June rate (after next month’s elections) remains in the works.

GBPUSD gained nearly a full cent off its lows to $1.88, now sees resistance at $1.8845, followed by $1.89—38% retracement of the $1.9549-1.8507 drop. Key resistance stands at $1.8970—the 100-day MA. Support starts at $1.8730, followed by 1.87 and $1.8620 support holding as the trend line extending from the $1.7750 low through the $1.8592 low.

Aussie turns to RBA announcement

Traders await this evening’s RBA rate announcement, which is widely expected to keep rates unchanged, but could reinforce the unwinding of carry trades from the high yield play. No analysis is due out from the RBA until next week. Support starts at 0.7650, and 0.7620. Resistance starts at 0.7730, followed by the 100-day MA of 0.7750 and 0.7775.

4:00 am E-12 Mar PMI Services (exp 50.3, prev 50.4) 4:30 am UK Mar CIPS Services (exp 55.0, prev 55.1) 10:00 am US Mar ISM Services ALREADY RELEASED ON APRIL 1st at 63.1 ( prev 59.8) 1:50 pm Fed Chairman Greenspan Speaks on Energy to the Petrochemical Industry. 7:30 pm Reserve Bank of Australia Rate Decision (exp 5.50%, prev 5.50%)

All eyes turn to this morning’s surveys on the services sector activities of the Eurozone and the UK. The US services ISM, scheduled for today was unintentionally released on Friday showing a rise to 63.1 from 59.8. Fed Chairman Greenspan’s speech on energy, which could contain warnings about the inflationary implications of rising oil. Greenspan is likely top be asked about exploration of oil at home and the use of alternative sources of energy but traders will look for any comments on his outlook for inflation.

US Treasury Secretary John Snow issued an unusually cautious assessment yesterday saying that high energy prices "are going to take some toll" on the US economy`s output. Snow, said high oil prices could act like as a tax and reduce economic output. Although the remarks are very much expected from any official, they seem to be a unusually gloomy from the usually sunny Snow.

Yen hits 108.60 on more data weakness

Weak economic data was exactly what the already damaged yen did not need today as it hit a fresh 5 ½ month lows against the dollar at 108.66 in mid day Tokyo trade. Japan’s household spending fell 3.7% in the year ending in February, coming in worse than expectations of a 3.2% drop following a 0.5% rise the in the prior period. Soaring oil and emerging, growth concerns as well as inferior yield levels are also exacerbating the sell-off.
Considering the deteriorating sentiment, the Bank of Japan is expected to maintain policy unchanged as it starts its 20day meeting today. There is a high likelihood, however, that the central bank will announce a downgrade of the economy later in the week.

USDJPY breached the 108.25-30 trendline resistance of the 120.67 high (June 2003) through the 114.86 high, now facing key pressure figure at the 108.73 point. Key barrier seen held at 109. Any stability could see the dollar ease at 108.30 and holds around the 107.70 figure. Interim support seen more durable at 107.30.

Euro Awaits PMI

Euro traders turn to this morning’s PMI report on services expected to show Markets turn to tomorrow’s PMI services seen down to 50.3 from 50.4. Weaknesses in services could accelerate the euro’s downward especially following yesterday’s downgrade of Eurozone growth by the European Commission. The latter revised the Eurozone's 2005 growth projections to 1.6% from the 2.0% made 6 months earlier. The Commission assumed an average EURUSD rate of $1.31 in 2005 and $1.32 in 2006.

Increased talk of the euro’s 200 day moving average at $1.2770 as a vital support level as the currency enters its 3rd straight daily loss. But first we have to see a clear breach of the $1.28 figure-- only at touching the 200da7 MA where such a break could be attained. Upside seen capped at $1.2860, followed by 1.2900 and 1.2940-45.

Cable Turns to PMI on growth clues

An expected decline in this morning’s services activity survey from the UK could help sway the Bank of England’s Monetary Policy Committee to hold rates steady in its 2-day meeting starting Wednesday. We saw the number of members demanding a rate hike rose to 2 of the 9 members last month. But Bank Governor King has made it clear that prices remain in check. Meanwhile, last week’s Nationwide house price report showing the largest decline since June 1995 will make any vote for a rate hike hard to swallow.

GBPUSD drifts around the $1.8750s. Support looms at $1.87 followed by $1.8620—which is the trend line extending from the $1.7750 low through the $1.8592 low. Any bounce is seen starting the initial resistance of $1.8845, followed by $1.89—38% retracement of the $1.9549-1.8507 drop. Key resistance stands at $1.8970—the 100-day MA.

Aussie could lose more after RBA inaction

Shrugging an improvement in the trade balance, Aussie drifts at a 3-week low of 0.7650, and could lose further ground after this evening’s RBA interest rate decision., which although seen leaving rates unchanged, could reinforce the unwinding of carry trades from the high yield play. No analysis is due out from the RBA until next week. Support seen at 0.7609. Upside capped at 0.7730, followed by the 100-day MA of 0.7750.

The dollar posted fresh gains across the board as traders focused on the cusp of higher US interest rates and gloomy growth outlook in the Eurozone. A brief spike in oil prices to a fresh all time high triggered fresh selling in the yen, which hit nearly 6 month lows against the dollar at 108.41.

The euro’s woes were prolonged by The European Commission’s latest forecasts, revising the Eurozone's 2005 growth projections to 1.6% on Monday from the 2.0% made 6 months earlier. The growth rate is well below the 3.6% seen for the US but better than Japan’s 1.1%. The EU Commission also expects oil prices to peak at $52.5 per barrel in Q2 and Q3 before declining to $46.50 per barrel at end of 2006 but said the economy was showing signs of moderate recovery on the back of reviving consumer demand. The Commission assumes an average EURUSD rate of $1.31 in 2005 and $1.32 in 2006. The Commission expects GDP growth to return to "potential" at 2.1% next year. Several other measures of Eurozone growth potential deem it at 2.5%, compared to 3.5% for the US. E-12.

The dollar’s rate optimism was underlined on Saturday by St Louis Fed Chief William Poole who reiterated the Fed’s inflation vigilance when he said "The upward thrust to the economy appears quite substantial and the risk of higher inflation over the next six months or so seems clearly greater than the risk that inflation will fall below a desirable range".

Euro’s wobbles near $1.28

As the euro’s growth concerns come to the fore, it nears the key $1.2760 support which could be called up as early as mid week. Markets turn to tomorrow’s PMI services seen down to 50.3 from 50.4.

Having broken its preliminary support of $1.2875, we see the currency’s support at $1.2850—a breach of which implies a fresh 2 month low. Accumulated selling seen extending to the key foundation at $1.2770—the 200-day moving average. Upside seen capped at $1.2945-50, followed by 1.2980.

Yen tests 26-month trend line support

Soaring oil, emerging growth concerns and inferior yield levels are pushing the Japanese currency to the bottom of the league. Breaching below the 107.89 level—USDJPY is testing the 108.25-30 resistance, which is the trendline resistance of the 120.67 high (June 2003) through the 114.86 high. Key pressure stands at the 108.73 pivot low. Chances of a retracement seen testing 107.30, followed by the 200-day MA at 106.75.

USDCAD breaks out of 1.22.

USDCAD broke out of its 100-day MA of 1.22 to hit a 1-week high of 1.2231 amid overall USD bullishness. Traders ignored an improved outlook in the Bank of Canada’s spring Business Outlook Survey released today, which found Canadian exporters less concerned about the Canadian dollar mainly due to its increased stability, and are more optimistic about the economic outlook than in the winter survey. Businesses generally continue to expect strong domestic sales

USDCAD resistance seen at 1.2240, followed by the 1.2272 resistance—the 50% retracement of the 1.2581-1.1976 drop. This resistance point also coincides with the trend line resistance extending from the 1.3818 high thru the 1.2572 high. Support starts at 1.2120 backed by 1.2080.

Aussie breaks to 3-week low

AUDUSD broke below 0.7660 support, hitting a 3-week low at 0.7650. Subsequent low comes up at 0.7609. Upside capped at 0.7730, followed by the 100-day MA of 0.7750. Traders await the evening’s trade figure seen up at a deficit of AUD 2.6 bln in February from AUD 2.7 bln. The RBA announcement follows Tuesday evening NY Time.

10:30 Bank of Canada Business Outlook Survey. 12:00 pm Fed Governor Gramlich Speaks. 9:30 pm Australia’s Feb Trade Balance (exp 0.5%, prev 0.7%)

FX traders turn focus to a array of meetings, reports and speeches from the leading central banks, as these take centre stage following last week’s disappointing US payrolls report, which may have signaled the peak in the rebound of US job creation. With service jobs growing at their lowest level since July and manufacturing employment dipping back in the red following February’s strong 20K rise -- which was caused by returning striking autoworkers—the triple digit job tap is likely to have dried up, especially amid the peak in the smoother 3-month average of payrolls.

The week’s key central bank events include today’s Business Outlook Survey from the Bank of Canada, Tuesday’s evening’s interest rate decision by the Reserve Bank of Australia and Thursday’s interest rate announcements from the Bank of England and the European Central Bank. Thursday evening’s release of the Bank of Japan monetary policy report should also be scrutinized for the Bank’s latest assessment on the economy. Tuesday’s speech on energy by Fed Chairman Greenspan’ should shed light on the Fed’s perspective on escalating oil prices and whether their inflationary potential is surpassing their contractionary impact on economic activity.

None of the meetings are expected to produce a change in interest rates but we caution any change of tone by the ECB in its post-rate announcement press conference such as increased hawkishness signaling a looming rate hike. Although the argument for an impending ECB rate hike have waned due to increased economic sluggishness and benign inflation (flash CPI remaining at 2.1% in March), the Bank’s inflationary concerns have shifted towards increased monetary activity and housing prices.

Recall that in its last press conference a month ago, the ECB said: “…medium-term upside risks to price stability exist and will be monitored closely”, while stating that: “As a result of the persistently strong growth in M3 over the past few years, substantially more liquidity in the euro area exists than is needed to finance non-inflationary economic growth. This could pose risks to price stability over the medium term and warrants vigilance.”

Speculators Rush to the Greenback

It was another strong week (ending March 29) for the dollar in the futures market as Speculators accumulated their dollar net longs against the lower yielding currencies of Japan and Switzerland and further curtailed their dollar shorts against Aussie, euro, loonie and sterling.

Euro net longs dropped 35% to a 5-week low of 17, 753 contracts. Although still in net long positions, euro contracts have fallen in all but 4 weeks of the current year. Sterling net longs fell 56% to reach a 6-week low of 11,874 contracts, posting 3 consecutive weekly declines. CAD net longs fell 15% to 26,690 contracts after 2 weekly gains. AUD net longs plummeted 51% to 26,624 contracts, the lowest level since January. Meanwhile, the yen continued to be the least favored currency by speculators as these yen shorts hit their highest level of the year, escalating by 154% to 30,189 contracts. CHF traders added on to their net short positions as these grew 24% to 14,042 contracts, the highest since February.

Euro’s downside still weighs after Payrolls

Euro’s meanders below the $1.29 figure as sentiment remains clearly on the negative after Friday’s its failure to sustain any meaningless rally following the disappointing US jobs report. While euro bulls could argue the euro’s failure to sustain its rally was due to an erroneously strong ISM release, the euro began a notable sell-off half an hour before the ISM release and half an hour after the payrolls. In the short term we see dollar being pressured amid oil prices’ latest surge to a new record of $57.80 per barrel in Monday’s Asian trade. But upside forces remain in place for another strong week.

We continue to see euro’s preliminary support acting at $1.2875, followed by $1.2850—a breach of which implies a fresh 2 month low. Accumulated selling seen extending to the key foundation at $1.2770—the 200-day moving average. Upside seen capped at $1.2945-50, followed by 1.2980.

Oil adds to Yen’s latest woes

Now that the cusp of yen gains ahead of the fiscal year end is out of the radar screen, traders see surging oil prices and the recent disappointment in last week’s tankan survey as forces testing the 107.89 high—the 61.8% retracement of the drop from the 111.75 high to the 101.66 low. A breach above 108 faces the 108.25-30 resistance, which is the trendline resistance of the 120.67 high through the 114.86 high. Key pressure stands at the 108.73 pivot low. Chances of a retracement seen testing 107.30, followed by the 200-day MA at 106.75.

Cable nears $1.87 as Bank of England seen on hold

We see further bearishness persisting ahead of the week’s services index and manufacturing production report, which are unlikely to strengthen the case for a looming rate hike. This week’s BoE meeting is expected to keep rates unchanged, but the key question is whether more MPC members will call for a rate hike. Sterling is also under the pressure of following last week’s Nationwide house price report showing the largest decline since June 1995.

GBPUSD enters the second day of losses targeting the $1.87 figure, followed by $1.8620 support holding as the trend line extending from the $1.7750 low through the $1.8592 low. Upside seen starting at initial resistance of $1.8845, followed by $1.89—38% retracement of the $1.9549-1.8507 drop. Key resistance stands at $1.8970—the 100-day MA.

USDCAD hovers around 100 day MA.

Traders turn to this morning’s Business Survey from the BoC for any hint son the timing of the next rate hike following the latest run up in inflation. Canada 's core inflation hit a 7-month high in February, rising 1.8% y/y from January’s 1.6%, further nearing the Bank of Canada 's 2% target. The core inflation index excludes 8 volatile components, including gasoline, fuel oil, natural gas and cigarette prices. The Bank’s headline inflation rate –including all-items rose to 2.1% y/y gain - the fastest since November.

USDCAD extends past 1.2170 towards the 100-day MA of 1.2200, a test of which comes up at 1.2220. Key resistance held at 1.2260. Support starts at 1.2120 backed by 1.2080.

Aussie nears precipice

AUDUSD nears the 0.7660 support, which paves the way for the 2-month low. Transitional losses seen stabilizing at 0.7630 and 0.76. Upside capped at 0.7730, followed by the 100-day MA of 0.7750.

US non-farm payrolls rose 110,000 in March from a revised 243,000 reading in February, while the unemployment rate fell to 5.2% and average hourly earnings grew 0.3% from 0.1%. The March report followed an aggregate downward revision of 27,000 jobs in January and February.

The rise in the payrolls figure undershot our expectations for 160-170K rise--yet was farther away from consensus estimates of 220K--due to our underestimation of construction jobs.
The sharp fall in unemployment rate to 5.2% from 5.4% reflected the data in the Household survey, which showed the number of unemployed declining to 7.66 million and the civilian labor force (denominator of unemployment rate) rising by 25K to 148.16 million.

Services Grew Lowest in 8 Months

Payrolls in services industries added 86K jobs in March, the lowest increase since July. A major culprit was the 9.7K decline in retail jobs—also the biggest since July as well continue layoffs in the Transportation industry. Professional and business services created 27K from 81K jobs the prior month, with temporary help adding no jobs following a 26K increase in February

Manufacturing Back in the Red

Manufacturing failed to keep up with February’s blockbuster 20K creation of jobs, which was revised down to 15K. It was noted that February’s strong in manufacturing emerged from returning auto workers, who accounted for half of the job gains following larger than usual temporary layoff in January. In March, manufacturing lost 8K jobs and totaling 8 months of losses over the past 10 months. We noted last month our skepticism with companies’ ability --apart from auto industries—to continue hiring amid higher oil costs. Accumulation of cash balances have been widely documented to be allocated for debt repayment and mergers, with stark evidence used for hiring.

Taking a longer term view (beyond the summer), there lies the possibility that the recovery in hiring may have reached its peak. Indeed, the March payrolls showed the 8th consecutive monthly triple digit (in thousands) creation of jobs, a feat last seen the last 8 months of 1999-2000. But the chart (SEE ARTICLES & IDEAS) below suggest that the overall trend --as smoothened out by the 3-month average—show a potential peaking in job creation. We have already highlighted above the recurring layoffs in the transportation and auto industries, as well as the relatively short-lived nature of professional and business hiring. This explains the increased volatlity in services industries relative to the prevailing stability (albeit negative) in manufacturing industries.

Dollar’s Recovery Speaks Volumes…ISM Prices Helped

• The dollar’s slide in the aftermath of the payrolls’ release was more than reversed about an hour later reflecting a boisterous improvement in sentiment for the US dollar that is widely founded on the Fed’s resolve to raise interest rates.

• The morning’s subsequent releases showing continued manufacturing expansion (ISM manufacturing slipped to 55.2 from 55.3 after erroneous releases showing a higher figure) and a record level in construction spending played a key role in extending the post-payrolls recovery in the dollar’s. The 8-point jump in the Prices Paid Index also justifies the Fed's inflationary alert.

• The dollar’s strength prevails on the fact that the disappointing jobs report does not prevent the Fed from raising interest rates in the May and June meetings. The drop in the unemployment rate to 5.2% and the rise in the 0.3% increase in average hourly earnings also reinforce the notion of a 3.25% fed funds by end of June.

• The current reasoning underpinning the strong dollar runs as follows; as long as the Fed maintains its inflation vigilance, currency markets are left with the possibility of further tightening beyond June 2005. And while most observers deemed the continuously benign inflation rate (as measured by core price PCE at 1.6%) as a potential negative for the dollar, we see it as a positive for the currency due to the positive impact it has on the real level of the fed funds rate. Thus, if inflation continues to regain at 1.6%, into the end of the quarter, 2 more Fed rate hikes will lift the real fed funds rate to 1.6% (3.25% -1.6%) , far higher than the Eurozone’s negative real interest rate (2.0%-2.1%).

• The onset of this expanding yield margin should continue to supporting the dollar (up to $1.27-2670 vs euro and 108.40 vs yen ) But the monthly rendez-vous with the trade figures and Treasury TICS reports will continue to weigh ahead, especially with the inflation-challenged Treasuries repealed by foreign-based hedge funds.

4:30 am Mar UK Manufacturing PMI (exp 51.8, prev 51.8) 8:30 am US Mar Nonfarm payrolls (exp 170K, prev 262K) Mar Unemployment Rate (exp 5.3%, prev 5.4%) US Mar Average Hourly Earnings (exp 0.2%, prev 0%) US Mar Manufacturing ISM (exp 55.0, prev 55.3) US Feb Construction Spending (exp 0.5%, prev 0.7%)

This morning’s payroll report will be instrumental in shaping the course of the dollar’s rally and the path of the long term interest rates. We expect the creation of about 165-70K jobs, which is lower than the 220K consensus of estimates. Although Thursday’s release of the Chicago PMI survey showed its employment component jumping to its highest level since 1983 at 66 from 57.7, we expect a slight retreat in job creation in manufacturing and services to about 10K and 130K from 20K and 207K respectively. Especially significant is the average hourly earnings figure, which will signal on whether there are signs of pay inflation or not. Any number of at least 0.3% could get markets attention for inflationary nervousness but the overall dollar reaction should depend on the combined outcome expected between the payrolls and the hourly earnings.

On the jobs front, US jobless showed an unexpectedly strong 20K rise to 350K beating forecasts of a 322K reading while the 4-week average rose 8.5K to 336K. This is leading us to lower our forecast for tomorrow’s non-farm payrolls release. We think that any figure above 200K will generally help the dollar while anything under it could help push the euro into the $1.30 level up to1.3060 and the yen towards 107.00.But we do think the hourly earnings will also be influential, with dollar bulls cheering any figure of more than 0.2%.

Disappointing Tankan sustains USDJPY

USDJ hovers around the 107.60s after Japan's Tankan sentiment for large manufacturers dropped to 14 in Q1 from 22, disappointing expectations for a 1-point rise. Meanwhile, large non-manufacturer sentiment fell to 11. Expectations for large manufacturers into Q2 were brought down to 14 from 23. Japanese officials described the report as showing slow pace of rising activity, boosting USDJPY to 107.60s from the 107.00.

USDJPY is hovering above the 107.50 trend line resistance extending from the 111.43 high, with little resistance at 107.75-80. 108 comes up as the trend line resistance extending from the 125.71 high thru the 114.86 high. Support starts at the 107 figure backed by the 200 day MA at 106.76 and 106.30.

Euro braces for payrolls

Euro bears are keeping their hand on the trigger ahead of the payrolls which call up the break of the 1.2850 low within minutes if the figure comes in above 220-30K, especially if the earnings grew by at least 0.2%. A break below 1.2875 sees support at $1.2850, followed by $1.28—trend line support extending from the $0.9859 low (Dec 2002 low) through the $1.0761 low. The 200-day moving average at $1.2750 continues to serve as the key barrier.