The dollar was virtually unchanged against the majors on combination of thin pre-holiday trading and mixed data out of the US. USD saw fresh lows versus the euro, as traders continued to unwind dollar-long positions following yesterday’s FOMC minutes, but retraced to session-opening levels near 1.18. The greenback also traded lower against the yen with Japan’s monetary policy seesawing under the weight of last night’s remarks by BoJ Governor Fukui, but also ended the session on par with yesterday’s close. Volatility should remain muted into the weekend, with a national holiday of Thanksgiving in the US tomorrow and traditionally quiet market action on Friday.

Initial Weekly Jobless Claims Turn Higher

After a 6-month low reading of 303k last week, initial weekly jobless claims came in significantly higher at 335k this week, far outpacing analysts expectations of 310k. The Labor Department reported that the claims related to Hurricanes Rita and Katrina accounted for 10k vs. last week’s 11k, which is indicative of an employment impact from these natural disasters lingering for months ahead. So far, the cumulative effect of lost jobs after the hurricanes totals 555k.

Claims for last week were revised marginally upward to 305k, while the four-week moving average rose by 1.25k from last week’s revised 322k to 323.25k.

US Consumer Sentiment Rebounds

On the bright side, following a September plunge and another decline in October, US consumer confidence as measured by the University of Michigan sentiment survey was revised up to 81.6 in late November from a figure of 79.9 earlier in the month. The sentiment reading was well above the October level of 74.2, which bodes well for this holiday shopping season officially set to kick off in the US the day following tomorrow’s holiday.

Two-Year Note Auction Shows Increasing Foreign Interest

This morning’s $20 billion auction of new two-year notes revealed an increasing demand for US treasuries among the indirect bidders. Comprised of customers of primary dealers and foreign central banks, this group took home $7.95 billion worth of 2-year notes or 39.8% of the total, markedly higher than the 34.3% average of this year’s 10 other auctions.

The closely watched 10-2 – year note difference pulled up to 14 bps level, after bottoming dangerously close to flat at a 5-year low of 8bps. The recovery comes on the heels of yesterday’s FOMC minutes’ signaling of the Fed tightening nearing its end.

BOE Unanimous on Rate Level, Uncertain on Inflation and Growth

The Bank of England’s November 10th meeting minutes showed that the central bank officials were in full consensus on leaving the repo rate at 4.5%. Furthermore, the minutes indicated that the Monetary Policy Committee did not discuss cutting interest rate levels, as some have recently speculated. BOE did note that UK’s 2006 second-half growth should exceed that of the first, however the sentiment for future pace of UK demand growth was widely varied. Similarly, in regard to inflation, the minutes reflect a view of risks on both ends being evenly balanced, but near-term inflation projections were marred by uncertainty.

Sterling rallied from 1.7214 to near session-high in 1.7250’s following the release of the minutes, as traders cheered further likelihood of interest rates not being cut, but pulled back toward 1.7230 by the end of the day. With yesterday’s high of 1.7243 taken out, resistance levels of 1.7270 and 1.7310 appear to be the new upside targets. Downside remains capped at 1.7150.

EUR/USD Gravitates to 1.18

The euro corrected after last night’s FOMC-fuelled run-up to 1.1867, falling as low as 1.1762 before rebounding higher following weak US unemployment numbers. The pervasive shift in sentiment from both central banks appears to be pivotal for the EUR/USD in the near months ahead. For now, the euro finds an interim base at 1.18 and having broken through the 1.1848 resistance earlier, it seeks to inflict further damage.

The next upside target is 1.19, while 1.1760 should cap near-term downside.

Yen Freefall Subsides

After yet another unsuccessful attempt to break above 119.60 yesterday, USD/JPY is struggling to hold on to its gains. The yen fell against the dollar to single-week low of 118.19 before pulling higher to end the session in 118.80’s. Governor Fukui re-asserted the central bank’s independence over the timing of the decision to end BoJ’s ultra-easy monetary policy. With Fukui being a more vocal proponent of impending tightening in the face of political opposition, the yen rallied.

Having established its presence at 118.20—the 50% retracement of the 116.84-119.56 rise, the yen now finds support at 117.86. Resistance at 119 and 119.30 persists.

4:30 am Bank of England Minutes (exp 9-0, 9-0), 8:30 am US Weekly Initial Jobless Claims (exp 310K, prev 303K), 8:30 am CAN Oct Leading Indicators (exp 0.3%, prev 0.3%) 6:50 pm Oct Trade Balance (exp yen 878.9, prev yen 954 bln)

The dollar sell-off which started on Tuesday following the release of the FOMC November minutes is intensifying across the board, as the US unit hits 3-week lows against the euro and Canadian and 1-week low against the yen and British pound. The minutes noted that:” Several aspects of the statement language would have to be changed before long, particularly those related to the characterization of, and outlook for, policy”. That means that the Fed could revise its statement as soon as next month’s meeting by stating a more specific time limit for the tightening campaign to lend some finality to the conclusion of the rate hikes. Although the market prices 2 more rate hikes (Jan and Feb), such pricing could be modified with the addition of a clearer visibility as to when the Fed would end rates, as opposed to solely –whether it would raise rates in the first 2 months of the year.

The Fed has also said it was aware of the risks of too much tightening.

We have long said that the dollar could begin to come under pressure when the market obtain better visibility as to when the Fed would conclude its rate hikes. Even if that means US interest rates will end at 4.50%, well above the anticipated 2.25% in the Eurozone, markets will have a tendency to unwind the dollar longs especially accumulated over the past 2 months at the behest of the Federal Reserve’s explicit resolve to combat inflation. The combination of renewed acceleration in the US trade deficit with the looming conclusion of the Fed's tightening campaign could pave the way for the next dollar decline.
The Fed is always aware of the flattening yield curve, which commanded the lowest 10-2 year yield spreads in 5 years at 8 bps last week. The curve flattening was enforced by increased tightening expectations as traders priced increased rate hikes (on the short end) and increased downside growth risks (on the long end). The combination of renewed acceleration in the US trade deficit with the looming conclusion of the Fed's tightening campaign could pave the way for the next dollar decline.



Yen lifted by Fukui’s assertion

Today’s remarks from Bank of Japan Govenor Fukui asserting the central bank’s independence over the timing of the change of monetary policy are empowering the yen across the board. One week after Japanese politicians—including PM Koizmui—imposed their weight on the decision making of the BoJ by opposing any near-term tightening of policy, the BoJ Governor sounded off a double-edged message of the BoJ being in full control of the monetary policy decisions despite an implicit collaboration with the government.

Breaking support at 118.50, USDJPY sees subsequent target at 118.20—the 50% retracement of the 116.84-119.56 rise. Key foundation follows at 117.86. Upside seen capped initially 118.75, followed by 119 and 119.30.

BoE chatter drives sterling

One day after Bank of England’s MPC member Kate Barker expressed her optimism with what she sees as: “some kind of improvement in consumer spending by the middle of next year”, MPC member Walton reminded of the bank’s need to watch the ensuing inflation developments, as the CPI rate has just come off its all time highs of 2.5%. Last week, the Bank of England’s Inflation Report showed inflation to slip below the 2-year period, prompting sterling into a sharp sell-off. But the central bank cannot ignore its government imposed 2.0% inflation ceiling, which has been consistently surpassed this year.
But sterling has partially recovered, eyeing interim resistance at $1.7270 and $1.73. Key resistance stands at $1.7344—the 38% retracement of the 1.7792-1.7062 decline. Support holds at $1.7170, backed by $1.71.

EUR favored by shifting central bank environment

The ensuing hawkishness in the European Central Bank coupled with a looming cautiousness by the Fed over its 18-month old tightening campaign is shifting the euro from accumulated support to increased bullishness. We do not consider ECB president Trichet to have made contradictory remarks when he clarified that a December rate hike would not be necessarily followed by subsequent rate hikes. His message clearly outlined that the Bank was merely lifting its foot off the accelerator rather than hitting the brake pedal.
EURUSD breaks the $1.1850 resistance, which is the 38% retracement of the drop from $1.2175 to $1.1639. Interim resistance follows at $1.19. $1.1775 with emerging foundation at $1.140-45.

The dollar traded moderately higher for most of the session, capitalizing on weak manufacturing report from the UK and yesterday’s correction by ECB president Trichet that the impending hike would not necessarily mean further action. At 2pm EST however, the dollar was jolted by the release of minutes from the November 1st FOMC meeting, selling off briskly across the board.

The minutes revealed that Federal Reserve policy makers agreed that the economy had shrugged off the impact of this summer’s hurricanes, leaving higher inflation as the biggest threat to the economic outlook. And "while FOMC members noted some recent favorable data on core inflation and labor costs, upside risks to the outlook for underlying inflation remained a key concern." Subsequently, Fed policy members were unanimous in their decision to hike rates by a quarter percentage point to 4.0%.

However, some Fed officials departed from its unequivocal commitment to tightening, expressing concern for the first time that there were growing risks of excessive hike rates hurting the economy. "Some members cautioned that risks of going too far with the tightening process could also eventually emerge," the summary said, and that increasingly the “incoming data (is) growing more important for policy moves.”

Furthermore, Fed policy makers agreed that in spite of the potential of the cumulative rise in energy prices and other costs to add to inflation pressures, “core inflation had been subdued in recent months and longer-run inflation expectations remained contained.”

November minutes have thus signaled that the tightening campaign of the inflation-vigilant Fed appears to will have reached a conclusion early next year. With expectations of inflationary pressures limited and further interest-rate hikes constrained to the near-term, the currency markets sold off the dollar.

Sterling Shrugs Weak Manufacturing and Wary Outlook

British pound fell over 110 pips to a fresh two-year low against the dollar of 1.7062, declining past last week’s low of 1.7095 before roaring back well above 1.72 to recoup all of its losses and then some after the FOMC minutes. Sterling was originally weighed down by new evidence of deteriorating manufacturing sector in the UK as shown by today’s report from the leading UK business lobby group.

The Confederation of British Industry said that despite an improvement in export order books for November, total orders books remained unchanged since last month, underscoring weak current domestic demand conditions. "Manufacturers have faced an extremely challenging year and the latest figures show no overall improvement over the last month," said Ian McCafferty, the CBI's chief economic adviser. "Robust demand internationally has lifted the export figures, but this has been offset by a deterioration in domestic orders which is of real concern."

The survey also found that price expectations are mildly deflationary, with 13% of firms polled planning to raise prices while 18% expecting a reduction. As a result, the CBI said firms expect profit margins to remain under pressure.

Elsewhere, Kate Barker - a member of the Bank of England's rate-setting Monetary Policy Committee – acknowledged that the current climate "calls more for caution" than "for optimism". However, she also thought that spending in the UK should pick up in 2006. "It is not surprising, with rising petrol prices and energy bills, that people have decided to spend their disposable income elsewhere, but I am confident we can see some kind of improvement in consumer spending by the middle of next year," she said.

Post-FOMC minutes’ dollar weakness was seen as the primary driver for sterling gains. So far, the upside is contained below yesterday’s GBP/USD high of 1.7243 however, with further resistance levels of 1.7270 and 1.7310 starting to come into focus. Downside is capped at 1.7150.

Euro Catapulted Above 1.18

The euro rallied late in the day on combination of USD weakness following the release of November FOMC minutes as well as unwinding of dollar-long positions by currency traders ahead of the Thanksgiving holiday. Single currency broke through the interim support at 1.1805, the 38.2% retracement of November declines, opening the door to 1.1840 and 1.1880 levels. Support is now found at 1.1740 and 1.1685.

Loonie Takes Advantage of Dollar Declines

Canadian dollar saw a second consecutive day of gains against the greenback, with USD/CAD piercing through the 50-day moving average at 1.1793 and falling to 1.1730’s. The loonie was initially wounded by lower than expected headline annualized October CPI figure, which came in at 2.6%. Canada’s inflation gauge was below analysts’ expectations of 3.0% and sharply lower than last month’s 3.4%.

However, the rebound in the price of oil pulled the Canadian dollar back to the upside for the day. The price of crude per gallon jumped toward the $59 level after falling below $57 last week and lingering under $58 yesterday. Oil price gains were attributed to expectations of cold weather boosting the demand, but are likely to be temporary considering oversupply as well as current surplus of heating oil.

Having penetrated the 50-day line support, USD/CAD is now breaking through the 61.8% retracement of 1.1640-1.1975 rally. Bearish sentiment is further evidenced by the MACD histogram as seen below, with the dip of the faster moving average opening the door for further downside. Subsequent downside is capped at 1.1710 followed by 1.1640, while resistance is seen at 1.1810 and 1.1860.

Only three days after departing from his original assessment of the European Central Bank interest rate levels being “appropriate”, ECB president Jean-Claude Trichet rattled the currency markets again this morning. On Friday, in a speech delivered at the European Banking Congress, Trichet said the ECB was finally prepared to raise interest rates, pointing to more sustainable growth and job creation that would result from higher interest rates. However, speaking before the European Parliament Committee, Trichet clarified his Friday's remarks, indicating that a December rate hike would not necessarily be the first of many. Trichet’s changing tone sent the euro south, with traders anticipating a more hawkish rhetoric.

"After two and a half years of maintaining interest rates at a level historically exceptionally low, I would consider that the governing council is ready to take a decision to move interest rates, and to moderately augment the present level of ECB rates in order to take into account the level of risks to price stability that have been identified," Trichet told the committee. "We would thus withdraw some of the accommodation which is embedded in the present monetary policy stance, while the policy would remain accommodative… This move would aim at coping with inflationary risks in order to maintain and preserve full confidence in price stability, and to continue solidly anchoring inflation expectations," he said.

Trichet’s comments arrived on the heels of September trade balance data from the Eurozone, which came in at 1.4 billion euro surplus and was seen dramatically improving from 0.7 billion euro August deficit. Analysts’ consensus had called for a far more modest 0.3 billion euro surplus.

EUR/USD see-sawed between announcements, rallying to fresh 2-week highs of 1.1836 following the trade data before falling sharply to 1.1716 lows after Trichet’s cautious remarks on the widely perceived shift in ECB policy. Key resistance levels remained intact at 1.1805, the 38.2% retracement of November declines, followed by 1.1874. Support stands firm at $1.1660.

US Leading Indicators Rebound

US economy showed new evidence of recovery from devastation caused by consecutive hurricanes in the Gulf Region. Following a severe drop in leading economic indicators in September, which were revised even lower from -0.7% to -0.8%, the October figure rebounded 0.9% to the upside. The rise was larger than expected, with consensus estimates predicting a 0.7% gain. October improvement is also significant because the August figure was not influenced by the hurricanes’ damage but showed a -0.2% decline nonetheless.

The numbers’ improvement was clouded by the accompanying comments from the Conference Board however, which were less upbeat about the future data. The Board stated that the index was consistent with an economy that "continues to expand more moderately in the near term."

USD/CAD Gains on Mixed Sales Data

Canadian retail sector remained robust in September with the exception of demand shown in vehicle sales. Overall retail sales fell 0.9 percent in September from August, greater than last August’s decline of 0.3% and far exceeding the projected 0.1% drop. However, the Canadian dollar shrugged the declines in the overall figure while cheering the 1.7% increase in all other sectors, which was greater than analyst consensus of a 0.8% gain. Renewed strength is particularly notable following a marginal 0.2% increase in August.

USD/CAD declined precipitously following the announcement, shedding nearly a full cent to as low as 1.1810 before retracing to 1.1830’s. The pair also sustained technical damage, dipping below the uptrend from 1.1640 while bringing the support of the 50-day moving average at 1.1791 into focus. Resistance starts at 1.1860 followed by 1.1910 levels.

Aussie at Two-Week High

AUD/USD continued its week-long march to the upside while reaching a two-week high at 0.7392, correcting further after a sharp fall from 0.76 to 0.7260. The technically driven subsequent pullback from 0.7392 - 38.2% retracement from 0.76 to 0.7260 - to 0.7360’s underscores that level as key near-term resistance. Subsequent resistance is found at 0.7440, while support is found at 0.7260 followed by 0.7210.

European Central Bank president Jean-Claude Trichet shocked the euro bears this morning by rescinding on his earlier assessment of the current Eurozone rates as “appropriate” and signaling an impending rate hike. Only 2 weeks ago during the press conference accompanying the last ECB decision to keep rates intact, Trichet commended the resiliency of the Eurozone to rising energy prices and pointed to a lack of build-up in core inflationary pressures. Currency markets responded with the upgrade in the probability of a change in ECB monetary policy and sold off the euro.

This morning, in a speech delivered at the European Banking Congress, Trichet said the ECB was now ready to raise interest rates. "After two and a half years of maintaining historically low interest rates, I consider that the governing council is ready to take a decision on interest rates," Trichet said, pointing to more sustainable growth and further job creation that would result from higher interest rates.

It is worth noting that we have called for a high likelihood of an ECB hike earlier this month, citing a lack of response to inflation as well as improvement in the Eurozone manufacturing sector. With 13-month highs in PMI and 4-year-highs in IFO survey figures, we said the probability of an ECB December rate hike was 80%.

The markets will get a fresh glimpse of the European economic conditions next week with release of the September trade balance figures from E-12 as well as the IFO data from Germany. Consensus estimates are calling for a 0.3 bln euro surplus in trade balance after August deficit of 0.7 billion euro. November IFO figures are largely expected to remain at about the same levels.

Germany’s “Grand Coalition” is Official

In other news from the Eurozone, Germany’s Christian Democrats and Social Democrats sealed their fate of working as a partnership following the impasse of September elections. The rivaling parties signed an agreement forming the first left-right coalition government in Germany since the 1960s, with Angela Merkel becoming the country's first female chancellor.

US Economic Calendar Clears Ahead of Next Week’s National Holiday

Following a US data-rich day on Thursday, which saw evidence of renewed declines from the manufacturing and housing sectors, currency traders turn their attention to next week’s data. On tap for the holiday-shortened week are Monday’s release of US October leading indicators, expected to rise 0.8% after September decline of 0.7%. Tuesday’s November Richmond Fed Index figure is estimated to decline to 10.0 after October reading of 12.0. Weekly jobless claims will be reported on Wednesday and are expected to come in slightly higher than last week’s 6-month low reading of 303k

On Thursday, all major markets in the US will be closed in observance of Thanksgiving holiday. The US stock markets have particularly good reason to be thankful, with both S&P500; and the Nasdaq registering new four and a half year highs.

EUR/USD Rallies on Trichet’s Comments

The euro tested this week’s high near 1.18 versus the greenback this morning after Trichet’s departure from his earlier commitment to the current ECB interest rate levels. Overnight, the euro sold down to 1.1662 but rallied nearly 130 pips following Trichet’s speech before correcting to close the week at 1.1760. Key resistance remains at 1.1805 - the 38.2% retracement of November declines - followed by 1.1874. Support stands firm at $1.1660.

BOJ’s Fukui Succumbs to Political Pressure, Talks Down the Yen

Seeking to further quell the rumors of putting an end to Japan’s ultra-easy monetary policy, Bank of Japan Governor Fukui denied a mounting discord between the central bank and Japan’s prime minister and his ruling party. Currency market’s anxiety over the likelihood of Japan’s near-term monetary policy changes was driven by Fukui’s earlier statements suggesting that an end to deflation and improving fundamentals would soon allow BoJ to tighten its stance. However, Prime Minister Koizumi disagreed, warning that such action would be premature. In this morning’s statement, Fukui conceded that inflationary pressures are unlikely to arise in the near future, while signaling that the end to the present policy framework would likely come "over the course of the fiscal year 2006", which starts on April 1.

The yen briefly rallied yesterday on rumors of an emergency meeting held by the People’s Bank of China prior to this week’s visit by President Bush. The goal of the meeting was said to focus on further revaluation of the yuan, which is seen as highly bullish for the yen. However, the denial by the Chinese central bank that such meeting took place, combined with Fukui’s dovish rhetoric, sacked yesterday’s yen gains.

USD/JPY gained 50 pips to 119.16 and EUR/JPY climbed over 70 pips to 140.16 from yesterday’s closing prices to today’s closing. 118.20 - the 50% retracement of the 116.84-119.56 rise – remains a key support while resistance is found at 119.30 and 119.60 levels.

The dollar sold off across the board today following new evidence of weakness from the US housing, industrial, and manufacturing sectors. Broad-based dollar decline has allowed the major USD counterparts to lift off the fresh 2-year lows resulting from the rising US interest-rate fuelled rally of the past few months.

The US Commerce Dept reported a 5.6% decline in construction of new homes in October to an annual rate of 2.014 million - a figure that marked an 8-month low for new house starts while strengthening the case for a peak in US housing activity. Building permits - which foreshadow future activity - dropped 6.7% to 2.07 million annual units. The dour sentiment as reported by the National Association of Home Builders is even more telling, plunging this month to the lowest level seen in 30 months. Consensus estimates had been calling for a 2.060 million new starts.

U.S. industrial production rose by an overall 0.9% in October, fueled by manufacturing output, the Federal Reserve said Thursday. However, the figure was slightly below the expected 1.0% level, pulling the dollar 50 pips lower against the majors following the release.

Manufacturing sector weakness capped off the trifecta of disappointing economic data from the US. This afternoon’s November Philly Fed Index, which fell from October’s 17.3 to 11.5, sparked a fresh round of greenback selling. Analyst expectations called for a marginal drop to 16.0 level.

Amidst the abundance of US data, the president of the St. Louis Federal Reserve Bank Poole gave a more benign assessment of a rising inflation. "To date, it appears little of the energy price increase has bled over into core inflation. Core PCE inflation has been fairly stable for the past several years, and I anticipate it will remain so," Poole said in a speech at Kentucky State University.

Dollar sell-off took place despite a 6-month low in initial jobless claims, which fell 25k to 303k - significantly below expectations of 324k. The claims drop also dragged down the 4-week average to fresh 2-month lows of 321.5k.

GBP Selling Subsides

The British pound broke a string of 10 consecutive daily declines against the dollar, rallying as high as 1.7224 before pulling back below the 1.72 level. Sterling has been particularly vulnerable to the recent greenback strength, falling more than six and a half cents in a span of just 2 weeks. This morning’s release of October retail sales figures from the UK, which came in as expected at 0.2%, was the initial catalyst to the pound strength.

GBP had suffered a major setback earlier in the week after the Bank of England’s quarterly inflation report revealed a sour outlook for inflation and GDP growth, raising a possibility of interest rate cuts in the coming months. Governor Mervyn King suggested that (inflation) "risks are evenly balanced, although the degree of uncertainty is larger than usual". King had also conceded that the BoE’s earlier projections for Q3 growth were too optimistic.

The pound joined the company of the euro and yen earlier on Wednesday, both of which had been making new 2-year lows against the dollar before today’s pullback. GBP/USD support levels are seen at 1.7140 and 1.71, while resistance starts at 1.7260 followed by the 38.2% retracement of the broad 1.3660-1.9550 move at 1.73.

Euro Shrugs Industrial Production Decline

The euro staged a broad-based rally despite a disappointing reading for industrial production, gaining nearly a cent against the greenback and rising modestly versus the yen. Euro-zone’s industrial output fell 0.4% in September after August’s 0.8% increase. Single currency’s strength against the dollar is easily traced to the weak US production and housing data. However, euro’s gains against the yen are particularly impressive in light of further yuan-revaluation rumors and bode well for the 3-month-long uptrend in EUR/JPY.

EUR/USD broke through the 1-week trend line resistance of $1.1725-30, shooting as high as 1.1761 before pulling back below 1.1750. Key resistance is the 38.2% retracement of November declines at 1.1805 followed by 1.1874. Support is firm at $1.1660.

Yen Consolidates Gains, Awaits BOJ Monetary Policy Report

Japanese yen continued to test the levels reached earlier this morning on circulating rumors of an emergency PBOC meeting to discuss further yuan-revaluation prior to the arrival of President Bush later in the week. USD/JPY briefly fell below 118.50 before correcting in the pre-US-data hours, and saw those levels again in afternoon trading.

The hotly contested future of BoJ’s monetary policy will come into focus with tomorrow’s release of the central bank’s monthly report, which is expected to highlight continued improvements in the Japanese economy’s fundamentals, further supporting the yen gains.

With interim support at 118.50 taken out, 118.20 - the 50% retracement of the 116.84-119.56 rise – marks a new downside target. Resistance remains at 119 and 119.30 levels.