3:55 GER Sep Unemployment Rate (exp. 11.6%, prev. 11.6%), 3:55 GER Sep Change in Unemployment (exp. -15K, prev. -12K), 8:30 US Weekly Jobless Claims (exp. 420K, prev. 432K), 14:35 CAN Bank of Canada Dep Gov Longworth Speaks, 19:30 JPN Sep Tokyo core CPI y/y (exp. -0.3%, prev. -0.3%), 19:30 JPN Aug Household Spending y/y (exp. -1.9%, prev. -3.3%), 19:30 JPN Aug Unemployment Rate (exp. 4.3%, prev. 4.4%), 19:30 US Fed Reserve Board Gov Kohn Speaks, 21:30 AUD Aug Retail Sales (exp. 0.3%, prev. 0.0%).

The dollar has softened this morning, trading lower across the board as the market awaits the final Q2 GDP figures for the US as well as the last installment of “Fed Speak” for the week. Economic growth in the US is expected to come in at 3.3% (Y/Y), which is the same figure as previous estimates released last month.

Usually, there is little market reaction to these final figures. Instead, the market will probably pay more attention to weekly jobless claims and the scheduled remarks by Fed Board Governor Kohn later this evening.

The effects of Hurricane Katrina are still reverberating throughout the US economy and today’s weekly jobless claims should continue to give us a look at the terrible storm’s impact. Following marked increases for the past two weeks, jobless claims are expected to fall back slightly from the 432K last week to 420K this week.

Tonight’s address by Fed Board Governor Kohn concludes a busy week for Fed watchers as a plethora of speeches by various Fed officials – including Chairman Greenspan – chimed in on the state of US economy with many, such as Moskow, Yellen and Hoenig delivering a fresh dose of hawkish rhetoric, helping to prop up the dollar.


Euro remains range bound despite poor labor data

Firmly entrenched between $1.20-21 this week, the euro is trading sideways today, holding on to the past two day’s worth of modest gains against the dollar despite a surge in German unemployment figures. Although largely the result of statistical reclassification, the number of unemployed in Europe’s largest economy increased by 39K in September – well above market expectations of a 15K rise – causing the overall unemployment rate to tick up to 11.7%. This news only adds to the already gloomy German labor data and comes on the heels of yesterday’s announcement that DaimlerChrysler will cut 8,500 jobs – about 9% of the workforce – at its Mercedes unit in Germany.

There is, however, a slight glimmer of hope for euro bulls due to yesterday’s “constructive” meeting between officials from both the CDU and the SPD trying to hammer out the details of a grand coalition between Germany’s two biggest parties. Another meeting is scheduled on October 5 – after the delayed election in Dresden, which should hopefully add some much needed clarity to the political situation.

Any indication that a German government is close to being formed should prop up the euro and likely push the pair higher towards resistance at 1.2080. Further resistance occurs at 1.2130 – the 38% retracement of the 1.1866-1.2587 move. Support starts at 1.2020, with key support holding at 1.1975.


BoJ comments give yen a lift

Comments from Bank of Japan Governor Fukui helped the yen improve against dollar in early trading, pushing USDJPY back below 113 to 112.80-90. Indicating that deflation is nearing its end as an increase in core consumer prices becomes likely, Fukui left open the possibility that the BoJ could begin tightening monetary policy in the near future.

Last night’s release of Japanese retail sales data for August was also positive for the yen as sales jumped 1.5% (M/M) from July – double projections of 0.6% – as consumers responded to an increase in wages and better job prospects. With continued foreign interest in Japanese equity, hawkish comments from BoJ officials and growing optimism about the economic state of the economy, the yen has tested support near 112.75. A break of this level sees further support at 112.60 and 112.20. Upside remains capped at 113.45-50, with extended bids capped at 113.71. Key resistance stands at the 114.49 resistance – the 38% retracement of the 135.15-101.66 decline.


Sterling weakness lingers

The pound is the only major currency that has failed to gain any ground against the dollar today as it remains flat near $1.7660-70 after it was reported by Nationwide that house prices within the UK dropped for the second month in a row.

September’s 0.2% (M/M) decrease matched the previous month’s decline and the 1.8% (Y/Y) gain was the slowest in over 9 years.

The possibility of another interest rate cut before the end of the year has begun to creep back into many traders’ minds as weak economic data for the UK begins to pile up. Apart from today’s disappointing housing data the market is also digesting yesterday’s unexpected drop in Q2 GDP growth as well as record low CBI trade data.

Support has fallen to 1.7635, followed by key support near 1.7600. Upside is capped at 1.7705 with further resistance at 1.7730.

The dollar’s posted short-lived gains in early morning US trading following a stronger than expected increase in US durable goods orders, but later retreated across the board at the end of the European session on mostly technical trading. The emphasis shifted back to energy markets as prices of crude oil surged back up amid renewed worries of falling inventories in the aftermath of the post-Hurricane Rita refinery shut downs. Offshore oil output in the Gulf of Mexico remains completely shut as 11 Gulf refineries remain closed because of Hurricanes Katrina and Rita. Crude oil rose nearly 2% to $66.35 per barrel in New York, but are 6% up from their $70.85 peak at the end of last month.

Durable goods orders rose by a greater than expected 3.3% in August, following a revised 5.3% decrease in July, which was the biggest drop in 18 months. Excluding transportation items, orders rose 4.2%, following a 3.7% drop. Markets had expected the core rate – ex transports to rise 1%. But the situation could reverse after this month's strike in Boeing may impact shipments and overall economic growth for the Sept and Oct.

The US Treasury's $20 billion auction of two-year notes drew 43.55% from indirect
bidders—most representative of foreign investors-- well above the 35.9% average of the past six auctions. But bond markets headed lower amid increased expectations that the Fed will raise rates in each of two remaining meetings. Fed funds futures priced a 62% chance of a December rate hike after a November move, up from 60% on Tuesday.

CAD fuelled by oil bounce (chart)

The Canadian dollar gained by more than half a cent against the greenback as the pair gave way to the ensuing developments in the oil market after prices of crude oil pushed up more than 2% to $66.35 in New York trade, just $4 away from last month’s all time high. Since 17% of Canada’s exports are energy related, the CAD is the only major currency to rise against the USD year-to-date. And with 15% of US refining capacity seen shut for at least another 2 weeks, energy prices are expected to sustain their upward momentum.
Persistent expectations of another 25-bp rate hike by the Bank of Canada as early as next month are also helping to support the loonie.

Breaching below 1.1740, USDCAD faces 1.1720 support—the 50% retracement of the 1.1622-1.1816 move. A break below 1.17 sees foundation at 1.1675. Upside capped at 1.1760 with downward pressure standing at 1.1795-00.



Yen caught between Yield Play & BoJ talk

The Japanese currency stabilized around amid increased media and analyst talk of an impending end to the Bank of Japan’s 4 ½ year old policy of quantitative easing. This policy aims at targeting the availability of credit as made by the amount of liquidity provided in the monetary system rather than targeting a numerical target rate of interest. Speculation has been highlighted by an emerging dissent within the 9-member BoJ policy board between those who state the central bank must not reduce its 30-35 trillion yen liquidity target for banks until inflation rises above zero, and those who call for a reduction in the target before the quantitative easing policy is completely phased out.

A drop in hedged Japanese overseas-bound capital flows has also been blamed on the yen’s weakness as Japanese investors are discouraged by Japan’s underperforming yields.

Having topped at today’s 113.42 high, USDJPY sees preliminary support at 112.60, followed by 112.20. Upside seen capped at 113.45-50, with extended bids capped at 113.71. Key resistance stands at the 114.49 resistance—the 38% rertracement of the 135.15-101.66 decline.

Euro’s modest prospects

The euro edged up amid the dollar’s technical retreat but upside potential is seen limited at $1.2080. Mounting pressure in Italy calling for the resignation of Italian central bank governor Fazio is not expected to weigh on the currency as potential successors are expected to be filled from the respected 6-member Executive Board.

Markets will also keep an eye on Sunday’s elections in the east German city of Dresden, where a delayed vote is expected to lead to the victory of the CDU candidate and fortify Ms. Merkel’s chances to be the next ruling Chancellor.

EURUSD resistance stands at $1.2080, followed by the $1.2130—the 38% retracement of the 1.1866-1.2587 move. Support starts at $1.2020, with key support holding at $1.1975.

4:30 UK Q2 Current Account Balance (exp. GBP -4.8 bln, prev. GBP -5.8 bln), 5:00 AUD Reserve Bank of Australia Gov Macfarlane Speaks, 8:30 US Aug Durable Goods Orders (exp. 0.8%, prev. -4.9%), 19:50 JPN Aug Large Retailers' Sales (exp. -2.9%, prev. -1.7%).

The currency market remains relatively flat with the dollar mixed this morning ahead of today’s release of US durable goods data for August. Both the euro and yen have gained modestly against the greenback – helped by continued coalition talks and foreign investment, respectively – while the pound has lost further ground due to sluggish growth.

After a rash of hawkish speeches by Fed officials, the dollar may get an additional bounce with the release of durable goods orders, which economists are projecting will increase anywhere from 0.8% (M/M) to 2.6% in August. Although these figures are quite volatile, a considerable increase could give the dollar enough momentum to break the $1.20 level against the euro and target 1.1950.

2-year US Treasury notes will also be auctioned off this afternoon with foreign investment increasing three out of the last four months. 44% of last month’s offerings were purchased by indirect bidders (usually a proxy for foreign investment) and a further increase in foreign interest could add to the dollar’s recent rally.


Euro improves as coalition talks continue

With a “grand coalition” looking increasingly likely as officials from both the CDU and SPD begin further negotiations today, the euro has regained some ground against the dollar and has managed to keep its head above the $1.20 level.

The euro was boosted by the fact that Germany’s election deadlock may finally be broken by the formation of a grand coalition between the CDU and the SPD. Current German Chancellor Gerhard Schroeder seemed to confirm this in remarks yesterday to the European Parliament in which he stated that “I am very certain there will be such a government in the shape of a grand coalition.”

Perhaps more importantly, however, Schroeder also seems to be coming to the conclusion that the next government will not include him as Chancellor. Previously adamant about the notion that the SPD would be unwilling to form a coalition with the CDU unless he remained in the chancellery, Mr. Schroeder has since backed down, insisting that the two sides should first work towards solving their policy differences before the topic of who should lead them is broached.

Dresden’s delayed election will take place on Sunday and current opinion polls have the CDU candidate out in front. Although the previous opinion polls vastly overstated the CDU’s appeal, if Ms. Merkel’s party manages to gain further ground against the SPD this should boost the party’s bargaining power.

The current rise in EURUSD faces resistance at $1.2080, followed by 1.1230 – the 38% retracement of the 1.1866-1.2587 move. Any extended gains are capped at 1.2160. Strong US durable goods date could force a retreat on today’s gains below the 1.20 level sees support at 1.1975, followed by 1.1950.


Foreign investment props up yen

The yen has risen slightly above its recent 16-month low against the dollar as foreign investors continue their buying spree of Japanese equity. Although USDJPY is still hovering above 113, there is some underlying support for the yen as foreigners remain net purchasers of Japanese shares for the 14th straight week – pushing the Nikkei 225 to a fresh four-year high.

Comments from a Bank of Japan official, Miyako Suda, could also help prop up the yen as Mr. Suda indicated that Japan’s recent economic growth could soon allow the central bank to ease its current loose monetary policy and, perhaps, begin to raise interest rates in the future.

Support for USDJPY is still holding near 113, with a break below this level calling further support at 112.76, backed by 112.20. Should the yen’s slide continue past this year’s high of 113.71, further resistance occurs at 114.49 – the 38% retracement of the 135.15-101.66 decline. The 200-week MA follows at 115.13.


Sluggish growth weighs down sterling

Sterling continues to get pounded, following today’s release that the Q2 GDP for the UK was revised down to only 1.5% (Y/Y) instead of the 1.8% growth that was originally estimated. This is the slowest annual rate of growth in more than 12 years.

There was some good news for the UK economy this morning, however, following news that the country’s Q2 current account balance showed the country’s deficit at its narrowest level since the first quarter of 2003, improving to GBP -3.1 billion from a downwardly revised GBP – 7.3 billion in Q1.

Currently changing hands near $1.7651, there are some technical signs that sterling could begin to regain strength against the dollar as its 14-day relative strength index remains near 18. Anything below 30 (or above 70) is usually seen as a signal of a change in direction. Such a change is likely to meet resistance near $1.77, followed by 1.7740 and 1.7760. Support is holding at 1.7651. Further support seen at 1.7635, with key support at 1.7600.

The dollar surged to 2-month highs against the euro and the yen (see USDJPY chart below) as Federal Reserve officials delivered a fresh dosage of hawkish remarks, reiterating the central bank’s priority to combat inflation, leaving FX traders no choice but to expect further yield accumulation in the US currency. The dollar shrugged a dismal report showing US consumer confidence dipping nearly 20 points to 86.6 in September, its worst level in almost 2 years. It was the largest drop since October 1990. Investors dismissed the report as a reflection of a temporary erosion in sentiment following the recent Hurricanes. Fed Chairman Greenspan’s address to the National Association of Business Economists revolved mainly on economic history, shedding light on the Fed’s challenges in stemming economic and market bubbles, rather than addressing the near term assessment of the US economy. The speech did not touch upon the risks to inflation or growth. The Chairman also praised the role of economic flexibility in enabling the economy to weather the shocks in energy markets. Greenspan stated the US central bank could have ended the 1990s stock market boom but at the risk of a big recession. He said: “we would have needed to risk precipitating a significant recession, with unknown consequences. The alternative was to wait for the eventual exhaustion of the forces of boom. We concluded that the latter course was by far the safer. Whether that judgment continues to hold up through time has yet to be determined.”Since Fed district presidents Moscow, Koenig and Yellen have clearly articulated Fed’s anti-inflation over the past 2 days, Chairman Greenspan chose to refrain from further expressing the Fed’s hawkish stance—possibly as a way not to shake off the markets.

San Francisco Fed President Janet Yellen relayed the Fed’s hawkishness by saying the Fed “must deliver” on commitment to price stability and that unacceptable rise in inflation is not an option. Although she indicated energy prices placed monetary policy in a dilemma, she placed energy prices at the top of the list of US economic risks. Yellen did ease her rhetoric by saying the Fed should not focus on deflating possible housing bubble, while adding that: "The so-called neutral fed funds rate might be lower than it has been historically but it's difficult to give a precise estimate ... of where neutral is”.

Speaking of neutral rates, with the current fed funds rate standing at 3.75% and annual core PCE price index at 1.8%, the real fed funds rate is at 1.85%. Given the 2.7% average (neutral) real fed funds rate of the past 45 years, the nominal fed funds rate will have to rise to as much as 4.50%, assuming core PCE at 1.8%. We do not think such a high fed funds rate would be sustainable in today’s economy, where oil prices are at all time highs, consumer spending have halved over the past 1 ½ years and higher rates are already starting to push up mortgage costs.

Yellen’s remarks follow those from Kansas City Fed’s Thomas Hoenig who described US to be “high enough to get your attention” – adding to evidence that Fed officials are more concerned with rising prices than declining economic growth.

Yen’s slammed by yield chasers

The Japanese currency continued to lose ground across the board, especially against the higher yielding dollar, shrugging the potential for an impending policy tightening by the BoJ and an expected improvement in next week’s release of the quarterly tankan survey of corporate sentiment. Explanations to the yen decline range from unhedged Japanese outflows into higher yielding dollar bonds, to profit-taking from Japanese-bound equity flows following the 4-year highs in the Nikkei.

The chart below shows the dollar to be nearing the 113.71 high, followed by the 114.49 resistance—the 38% rertracement of the 135.15-101.66 decline. The 200-week MA follows at 115.13. USDJPY support starts at 112.76, backed by 112.20.



Euro shrugs Ifo, fears Fed

The misfortunes of the euro were mostly tied to the Fed’s hawkish rhetoric and the prospects for higher dollar rates. Euro traders shrugged an unexpected rise in Germany’s IFO business climate survey, which hit its highest level since January, rising to 96 in September from 94.6 last month instead of dropping to 94.2 as the market expected. Part of the reason the single currency shrugged the report was that the country’s reaction to the recent political turmoil was not factored into the results.

Breaching below the $1.20 level, EURUSD sees support at the $1.1975, followed by $1.1950. We see limited room for a recovery at 1.2080, followed by the $1.2130—the 38% retracement of the 1.1866-1.2587 move. Any extended gains are capped at 1.2160.

4:00 E-12 Aug M3 Supply Growth y/y (exp. 7.9%, prev. 7.9%), 4:00 GER Sep Ifo Current Conditions (exp. 94.0, prev. 93.8), 4:00 GER Sep Ifo Business Expectations (exp. 94.6, prev. 95.4), 4:00 GER Sep Ifo Business Climate (exp. 94.2, prev. 94.6), 5:00 E-12 July Trade Balance (exp. EUR 9.1 bln, prev. EUR 6.5 bln), 10:00 US Sep Consumer Confidence (exp. 94.7, prev. 105.6), 10:00 US Sep Consumer Confidece (exp. 94.7, prev. 105.6), 10:00 US Aug New Home Sales (exp. 1.35 mln, prev. 1.41 mln), 12:00 US San Francisco Fed Pres Yellen Speaks, 14:45 US Fed Chairman Greenspan Speaks on the US Economy, 20:45 US Kansas Fed Pres Hoenig Speaks.

The dollar continues to strengthen in early trading, hitting fresh multi-week highs – including a 16-month high against the yen – following recent hawkish comments yesterday by Fed officials. Although Chairman Greenspan was circumspect as usual, comments from Chicago Fed President Moskow and Kansas City Fed President Hoenig were more revealing, with Moskow arguing that the US economy still had excess capacity and it was, therefore, necessary to continue reducing monetary accommodation, while Hoenig highlighted the fact that inflation in the US was “high enough to get your attention” – adding to evidence that Fed officials are more concerned with rising prices than declining economic growth.

Further insight into the Fed’s focus comes today with another round of speeches. Again, Chairman Greenspan tops the list as markets gear up for his speech this afternoon (2:45 pm) on the state of the US economy. Prior to Mr. Greenspan, San Francisco Fed President Yellen will address members of the British parliament at 12:00 pm. Finally, Kansas City Fed President Hoenig will speak again on the US economic outlook. With the focus remaining squarely on the Fed’s monetary policy and the likelihood that it will continue raising interest rates into the foreseeable future, the present outlook for the dollar is bullish.

Despite support from rising interest rates, there is a risk that the dollar may pare some of its recent gains if today’s consumer confidence report shows a larger than expected drop. Consumer confidence is projected to fall 10.3% in September to 94.7 from 105.6, which would not only be the index’s lowest level since last November, but the monthly drop would be the steepest since January 2003 – three months before the second Gulf war.

However, given the fact that the preliminary report from the University of Michigan’s consumer sentiment index for September plummeted to its lowest level since 1992, there is a strong possibility that the physical and psychological damage wrought by Hurricanes Katrina and Rita may have had a greater than expected negative impact on consumers.

New home sales data are also due out this morning and expected to remain near record high levels. Projected to come in at an annualized rate of 1.35 million for August, this would be the second highest figure on record after July’s 1.41 million number. Coming on the heels of yesterday’s 2% increase in existing home sales to 7.29 million units – also the second highest on record – the housing market remains “frothy” and certainly merits close scrutiny, as Greenspan mentioned yesterday.


USDJPY breaks above 113, hits 16-month high

USDJPY has broken above 113 for the first time since July 20 and is currently trading at its highest level since May 2004 as rumors circulate of Sony down grade. Additional pressure on the yen came last night as the BoJ’s corporate service price index fell 0.8% (Y/Y) to 92.6. This was the 89th straight monthly drop, suggesting that weak consumer demand is preventing companies from raising prices.

Strong resistance against a further yen sell-off is holding at 113.73 – the intraday high on July 20. Additional resistance is gathering at the May 20, 2004 high of 113.88. Support remains near 112.00-10, followed by 111.55. Key foundation stands at 111.20 – trend line support of the 3- week upward channel.


Euro weakens despite unexpected rise in confidence

Despite an unexpected increase in German business confidence, the euro failed to capitalize and remains lower against the dollar this morning, testing support near $1.20. The Ifo business climate survey hit its highest level since January, rising to 96 in September from 94.6 last month instead of dropping to 94.2 as the market expected.

Although many executives cited the fact that the euro’s recent slide against the dollar helped make German goods more competitive abroad, it should also be noted that much of the country’s reaction to the recent political turmoil was not factored into the results, thus offsetting the potential for future increases.

Also released this morning was August M3 data for the Eurozone, which accelerated to 8.1% (Y/Y) from 7.9%. Although the ECB no longer formally assesses M3 growth rates – mainly because it remains consistently above the initial reference value of 4.5% – the fact liquidity continues to increase will only add to the recent hawkish sentiment emanating from ECB officials as they continue to warn about possible inflationary pressures.

Finally, the Eurozone’s trade surplus data came in much lower than expected, falling to EUR 1 billion in July from a revised EUR 3.9 billion in June as energy imports jumped 39% (Y/Y).

Despite a temporary break below $1.20 support for EURUSD is holding at 1.2009. A sustained breach could call up further support at 1.2080, followed by the July 19 low of 1.1950. Trend line resistance remains at 1.2260. Resistance starts at 1.2124, followed by 1.2160. Key pressure point stands at 1.2233—the 38% retracement of the $1.2587-1.2009 drop.

The dollar edged lower today as traders shifted focus back to the Fed and housing prices, away from the weather as Hurricane Rita further lost power. August sales of existing homes rose 2% to 7.29 million, the second biggest increase since June’s 7.35 million. While historically low interest rates have continuously been attributed to the increase in demand, rising interest rates are pushing prospective home buyers to close the deal before further escalation of mortgage rates, thereby reinforcing demand.

Fed Chairman Greenspan gently upped his concern for the ascent in housing prices when he said the dramatic increase in exotic home loan varieties merited “close scrutiny” and that the purchase of second homes indicated speculation may play bigger role in price gains. Greenspan was sanguine to add that the US economy could absorb a savings adjustment via prices, interest rates and currency rates rather than via a decline in output. The Chairman also assured that the “majority” of homeowners could absorb declines in house prices due to their sizable equity cushion. He reiterated his general claim that higher saving would cut imports and lead to smaller trade and budget deficits.



Separately, a study by the US Federal Deposit Insurance Corp determined, there have been 63 rallies in home prices over the last 30 years, only 9 which ended in regional busts, rather than national. Interestingly, the home price run-up in the oil patch during the 1970s accompanied the rally in energy prices, before crashing in the mid-1980s following the end of the Iraq-Iran Gulf War. The housing rally in Southern California which was fed by aerospace spending during the military expansion of the Reagan years, collapsed in the early 1990s after the end of the Cold War.

Chicago Fed Moscow reiterated his hawkishness of two weeks ago when he said today the US economy was still had excess capacity and it was necessary to reduce monetary accommodation. He said he was watching the boost in government spending to address the damage of Hurricane Katrina and described any impact on output as temporary.

This week marks a flurry of speeches from Federal Reserve officials who will most likely affirm last week’s FOMC’s statement assessing a modest impact from the Hurricanes and urging for further policy tightening. Fed Chairman Greenspan’s speech tomorrow on the economy addressing the National Association of Business Economists should draw the markets’ scrutiny but the proximity to last week’s FOMC statement reduces the likelihood of shedding any fresh light. Speeches by San Francisco Fed President Janet Yellen (also on Tuesday) by and Fed Board Governor Kohn (Thursday) are worthy of notice. Nonetheless, at this time, markets’ interest is focused on Fed Board Governor Mark Olson, the only FOMC member to have voted against last week’s interest rate hike.

Euro off its lows, braces for weak US confidence

EURUSD recovered more than half a cent off its 2-month lows as markets awaited the flurry of speeches from the Fed. Markets turn to tomorrow’s September IFO survey expected to show a 94.2 reading in its business climate index following a 94.6 reading, but a modest rise in the current conditions index. The Ifo's business climate index fell by 0.4 points in August, after a 10.7 point increase in July. Last week, the ZEW Indicator of Economic Sentiment for Germany fell by 11.4 points in September to 38.6 points due to “uncertainty about the future economic policy” stemming from the election uncertainty.

Although the Eurozone's trade balance for July is expected to rise to EUR 9.1 bln from EUR 6.5 bln, markets will focus more on the September US consumer confidence figure report at 10:00 am expected to show a drop of more than 10 points from the 105.6 August reading, which would be the biggest single month decline since January 2003-- 3 months before the second Gulf war. Traders could show a modest reaction to significant drop on the rationale that Hurricane impact on confidence was transitionary.

EURUSD support stopped at 1.2009, a breach of which could lead to the preliminary target of $1.2080, followed by the Jul 19 low of $1.1950. Trend line resistance remains at $1.2260. Resistance starts at $1.2124, followed by 1.2160. Key pressure point stands at $1.2233—the 38% retracement of the $1.2587-1.2009 drop.

Yen’s mixed performance

The dollar retreated by more than half a yen to 112.08 against the dollar as the currency gained across the board on profit taking following Friday’s FX announcement from the People’s Bank of China. Despite yen’s protracted drop against the dollar, the Japanese currency has fared relatively well against European FX and Aussie. Japanese officials have criticized China’s decision to limit the yuan’s fluctuations against the dollar to +(-) 0.3%, compared to as much as +(-) 3% against the Japanese yen.

The yen could obtain a near term fillip ahead of next Monday’s tankan survey of corporate sentiment, expected to show further improvement in corporate sentiment, to which the Bank of Japan has been alluding. Meanwhile, recovery is also embedded in equities as the Nikkei extends its 4-year high run past 13,400 level.

USDJPY support starts at 112.00, followed by 111.55. Key foundation stands at 111.20—trend line support of the 3- week upward channel. Upside seen capped at 112.60, followed by 112.80.

Aussie eyes 12-month trend line

As AUDUSD enters its 3rd daily decline, it nears the 75.20 trend line support extending from the 68.51 low (Sep 04) through the 73.64 low (Jul 05). A breach of 75 cents could pave the way to 74.80. Upside starts at 76.06—the 61.8% retracement of the 73.64-77.62 run up. Resistance caps further buying at 76.40.