In the absence of new economic data today, the currency markets took the opportunity to digest all of this week’s developments while allowing the greenback to recover some of its losses. US dollar strength was most evident against the euro and the pound, pulling both the EUR/USD and GBP/USD pairs down with nearly a 100-pip correction. The euro decline extended to nearly $1.17 level, and the vulnerable sterling had dipped below $1.73. USD/JPY is seeking its first session close above 121, while the greenback also made strides against the rate-hike fueled loonie and the wounded by the GDP report aussie.

Despite more cold weather in the northeast, oil prices saw some relief this morning after a strong reading in US crude inventories. According to the report, inventories rose 2.7 million barrels in the week ended Dec. 2, versus consensus of -1.9 million barrels, while the refineries were seen to be operating at 90.6% capacity – first reading above 90% since being damaged by this year’s hurricanes. Oil traders remained anxious however, after news of al-Qaeda's new call for militants to strike oil sites in Muslim states.

Meanwhile, US treasuries cheered the report of sliding Q3 labor costs that implied an easing in inflationary pressures. Federal Reserve Governor Mark Olson confirmed that assessment in this week’s remarks, suggesting that inflation “remains muted” and that expectations for inflation have declined.

The gap between two and ten-year yields expanded to 10 basis points - 3 bps wider than the recent 4-year low margin of 7bps. Shorter-maturity yields have risen along with interest rate tightening by the central bank while longer-term yields have declined on speculation that rate hikes will weaken growth and stem inflation.

The Treasury Department is conducting an auction of $13 billion 5-year notes today and will hold an $8 billion auction for 10-year notes tomorrow.

EU mired in battle over budget

UK foreign secretary Jack Straw, whose country is presently charged with rotating European Union presidency, reflected on the bleak outlook for progress toward completion of Eurozone budget. “Because of the difficulties that are there, the area for
agreement is bound to be narrow,” Straw said. At the core of the debate is Britain's refusal to yield on its rebates in the face of French resistance to compromise on generous farm subsidies of which it is the main recipient. Continued failure for the EU members to come to terms on the budget signifies further discord within the Eurozone’s fiscal process and is clearly detrimental to European economy.

Elsewhere, Portugal's central bank governor and ECB council member Victor Constancio
became the latest voice to discredit speculation of further central bank tightening. Quoted in Portugese press, he said that there are no more rate hikes planned at this time.

Euro’s overnight sell-off was sparked by a pullback in the single-currency against the trodden down yen. EUR/JPY had rallied four and a half cents to JPY 142.50’s before yesterday’s retreat below JPY 142.

EUR/USD support is firm at $1.17 followed by $1.1660. Interim resistance is seen at $1.1755 followed by key level of $1.1840.

Yen recovery stalls

USD/JPY ended the day a pip below JPY 121 level, having moved to the higher end of the trading range at the end of the session. The yen was weighed down by commentary from Hidehiko Haru, one of the nine members of the central bank's policy board, who said that the yen's depreciation against the dollar is positive for the economy as it boosts the earnings of exporters. The yen has been in a freefall since September – the month that also marked the start of the Nikkei’s rapid ascend. Cautious central bank and ultra-easy monetary policy set against the backdrop of improving fundamentals are seen as reviving Japan’s stock market, while political pressure on Bank of Japan to maintain quantitative easing continue to haunt the yen.

Interim support is found at JPY 120.50, followed by JPY 120.10, while key resistance persists at 121.30.

Aussie in range after post-GDP report slide

The Australian dollar declined after 5 consecutive rising sessions following the RBA decision to keep rates intact at 5.5% and the lower than expected GDP report. This evening marks the release of November jobs figures from Australia, with the unemployment rate expected to remain at 5.2%. However, net change in employment is expected to rise from negative19.8k to positive 15.0k.

Further Aussie rally is met by resistance at 0.7485, followed by considerable resistance at 0.7530. Key support is seen at 0.7440– the 38% retracement of the 0.7762-0.7260 drop as well as the 50-day moving average level.

The Reserve Bank of Australia’s expected decision to hold rates unchanged at 5.50% initiated the Aussie’s 80-pip sell-off, which was later compounded by a the 0.2% Q3 GDP reading. Markets expected a 0.5% reading after a 1.3% rise in Q2. The Aussie sell-of comes at a time when traders have started raising the odds of a Q1 rate hike. We mentioned on Monday that: “We expect this week to be an opportunity for traders to partially scale down some of their carry trades, giving the high yielders in the US and Australia time for retreat. This week’s Reserve Bank of Australia’s interest rate decision is seen making no change, but the trade GDP data should provide modest interest”

Any Aussie pull back seen at 74.85, followed by considerable resistance at 75.30. Support testing 74.40 as interim target followed by 73.90 – the 38% retracement of the 76.00-72.60 drop.



CAD retreats for first time in 5 days

The Canadian dollar backs off after an impressive 15-day run as post-BoC rate hike combines with the weekly conversion of earnings from oil companies into USD. The expected 25-bp rate hike by the Bank of Canada lifted the overnight rate from 3.00% to 3.25%, the their rate hike of the year. This is the highest rates have been since June 2003 and is fifth hike of the tightening cycle, which began in September 2004. Interestingly, the nature of Tuesday’s tightening is not a reflection of a current rise in inflation since annual core CPI has stood at 1.7% during Aug-Oct, and remained below the central bank's 2.0% target since January 2004.

The central bank's statement was unchanged from the November rate hike in that it opened the door for further moves when it indicated that: "some further reduction in monetary stimulus will be required to maintain a balance between aggregate supply and demand over the next four to six quarters and keep inflation on target" even though it stated that the risks to the outlook are "balanced over the short term, but are tilted to the downside through 2007 and beyond".

Especially positive for the loonie is that the real overnight rate (overnight minus core annual CPI) stands at 1.30%, well over the 0.66% monthly average since January 2002. This means that the central bank is well ahead of the inflation curve, which it sees necessary to maintain even with the CAD gaining 3.7% against the USD year to date. Defensiveness ahead of further oil spikes is also amid the BoC arguments for sustaining the current tightening campaign into Q1, as long as the dollar makes modest gains versus its namesake, which could always be inflation-prone in the event of overzealous fuel and commodity prices.

The relatively hawkish statement (not more hawkish than November) helped to drag USDCAD under the 1.1550 right after the decision, but profit-taking is targeting the 1.16 figure. Subsequent reading stands at 1.1630. Support starts at 1.1550, followed by 1.1530, with key foundation at 1.1495—the 0.87 US$ of $C1.00.

USDJPY recovers despite strong confidence figures

The dollar stabilizes atop the 120 level after brief retreat following the jump in the October leading indicators and confidence numbers which rose to 80 and 88.9 from 45.5 and 88.9 respectively. The latest signs of govt officials insisting on extending the quantitative easing policy came from LDP finance panel chairman Yamamoto who asserted that the end of deflation should be measured by the GDP deflator as well as the expected rate hike of inflation and not core CPI inflation alone.

Tomorrow’s revision of the Q3 GDP is expected to show a 0.5% rise from 0.4%, adding a another dosage of stability to the yen. We have pointed out yesterday that Japanese residents’ outflows into overseas bonds have finally stabilized according top last week’s data, showing that local investors were net sellers of foreign bonds at 16.2 bln yen, the first net sale in 9 weeks. Interestingly, the net inflow of 10 weeks ago was only a week interruption of a series of 10 consecutive weekly outflows. If that is the end of the trend, then expect the dollar to have a lost a valuable foundation from its 13-yen rise over the past 3 months.

Technically speaking, the relative strength index on the 4-hour chart shows a sub 50-reading, the lowest in 3 weeks. The pair has consolidated since Dec 4, possible suggesting that 120.40 will be the next reading for testing in the event of traders’ unwillingness to test the highs in the absence of major figures from the US. Subsequent foundation held at 120.10, followed by 119.55-60. Interim resistance starts at 121.00, followed by 121.30.

Euro consolidation abounds

The markets is showing less attention to ECB-directed criticism by Eurozone politicians and is likely to begin positioning ahead of the week’s trade balance from Germany and US consumer sentiment from the Univ of Michigan. Yet these end –of-week events are unlikely to engender any considerable moves outside the $1.1660-1.1900 range before next week’s explosive array of data/events—including the FOMC decision, the US trade balance and the TICS.

EURUSD preliminary support seen standing at $1.1720, followed by $1.1670. Upside capped at 1.1780 with resistance testing at 1.1820.

The dollar was mixed in today’s session as news from overseas, combined with US productivity and manufacturing figures, dominated the market action. As expected, Bank of Canada raised interest rates by 25bps to 3.25%, causing a pre-announcement loonie rally to a fresh 13-year high followed by a sell-the-news correction. Meanwhile, sterling was pulled lower against the dollar following weak manufacturing from the UK.

The Labor Department reported this morning that the US productivity grew at the fastest pace two years. Third quarter figures soared to 4.7% annualized versus 4.1% reported last quarter. Analysts were expecting a strong figure of 4.5%, but that expectation was outdone in Q3. Year-over-year, productivity was also seen steadily rising to 3.1%.

Volatile unit labor costs fell 1.0% in the third quarter versus expectations of a 0.7% decline. The decrease was steeper than the previously reported –0.5%. Q2 Labor costs were also revised down to –1.2%, correcting earlier reading of a 1.8% increase.

September factory orders in the US were revised lower to 1.4% versus original 1.7%, however in October the factory orders were seen as reversing, ringing in a 2.2% gain. A strong demand for durable goods, which was upwardly revised to 3.7% from an already higher than expected 3.4% figure reported last week, contributed to the factory orders increase. Meanwhile, inventories gained 0.6% while shipments were seen 1.0% higher after September’s 0.4% fall. Above data was also seen as reflected by inventory-to-sales ratio decline to 1.17.

US October pending home sales fell 3.2% to a level 3.3% lower than that of last year, said the National Association of Realtors this morning. The latest figures shed new light on the weakening US housing sector after last week’s mixed data of a 2.7% slowdown in existing home sales along with a 13% jump in the sales of new homes. David Lereah, NAR’s chief economist, sees the decline as gradual, suggesting that the pending home sales index “is pointing to a soft landing for home sales.”

Bank of Canada raises rates, sees further tightening

In a widely predicted third rate hike this year, Bank of Canada tightened the interest rate to 3.25% this morning. The accompanying statement revealed expectations that the “risks to the outlook are balanced over the short term, but are tilted to the downside through 2007 and beyond.” BoC also hinted that it will continue to tighten so as to keep inflation levels on target.

The loonie is now targeting support levels at CAD 1.1530 and CAD 1.15, while resistance forms around CAD 1.16.

Aussie treads higher as RBA keeps rates at 5.5%

A lower trade deficit for Australia in October, as well as improvement in the Aussie housing sector, may not be enough to counter the decline in public expenditures, thus raising the possibility of a lower Q3 GDP. Consequently, AUD 1.33 bln trade gap – improvement from September’s 1.6 bln aud deficit – were not sufficient to sway RBA’s policy makers to raise rates at today’s meeting. Economists’ uniform expectations were confirmed when the central bank chose to keep the rate steady at 5.5%.

AUD/USD gained 35 pips on the session for a $0.7539 close. Resistance forms at $0.7560 followed by late October high of $0.76. Support is found at $0.7490 and $0.7450.

Eurozone manufacturing shows improvement, Euro consolidates gains

November PMI figures from Germany and the overall Eurozone came in higher than expected, with the former rising to 49.4 while the arrived at 50.7. Previous month’s readings were 48.1 and 50.4 respectively. Although a figure below 50 is still seen as contractionary, Germany appears to be well on its way to manufacturing recovery.

New round of improving economic conditions data came on the heels of yesterdays comments by German Finance Minister Peer Steinbrueck, who voiced his opposition to further rate hikes by the European Central Bank. Steinbrueck argued that a further tightening of monetary conditions would undermine Germany's fragile economic recovery. These statements also echo the sentiment from the IMF officials last week, who likewise discourage the ECB from further tightening.

The euro remained unchanged during today’s session at $1.1792. As stated last night, we continue to see EUR/USD test the initial resistance at $1.1820, followed by $1.1842—38% retracement of the $1.2172-1.1639 drop. Support is seen at $1.1720, followed by $1.1655-60.

UK manufacturers disappoint with multi-month low figures

The pound fell sharply on this morning’s dismal manufacturing data from the US, shedding 130 pips against the greenback to a session low of $1.7311 following the announcement. In a biggest monthly fall since March, manufacturing sector output for October was 0.7% lower than that of September and down 0.9% y/y. September figures were also downwardly revise to -0.4% from –0.3%. Industrial production weakened by 1% in October and 1.8% y/y. Analysts were expecting a 0.2% gain in both manufacturing and industrial production.

Sterling was able to recover some of it losses, ending the day at $1.7418. Further upside should be capped by resistance at $1.7450 and $1.7495, while support levels of $1.7380 and $1.7310 are likely to become next targets.

Continuing deterioration of UK fundamentals lend to a stronger possibility of a rate cut from BoE, despite the central bankers not yet being willing to acknowledge it. As the BoE members’ sentiment continues to vary however, the credibility of their projection for a 2006 recovery will remain to be questioned.

Yen stabilizes, looks ahead to economic data

Yen decline was stalled for 2nd consecutive day with USD/JPY still seeking its first close above JPY 121 level. Overnight, yen recovery prospects were strengthened by an improvement seen in Japan’s October household spending, which came in down 0.1% but above that of September’s –0.4%. Year-over-year, that figure was seen as gaining 2.0%. The yen continues to seek evidence that the protracted deflationary period in Japan is finished, which would force the central bank officials to consider ending its ultra-easy monetary policy.

Interim USD/JPY resistance remains at 121.30, followed by 121.86, while support persists at 120.70, backed by 120.40.

4:30 am UK Oct Manufacturing (exp 0.2%, -0.3%) 4:30 am UK Oct Industrial Production (exp 0.2%, prev 0.5%) 6:00 am GER Oct Factory Orders (exp 0.5%, prev 2.8%) 8:30 am US Q3 productivity (exp 4.5%, prev 4.1%) 9:00 am BoC interest rate announcement (exp 3.25%, prev 3.00%) 10:00 am CAN Nov Ivey PMI (exp 63.0, prev 64.8) 10:00 am US Oct Factory Orders (exp 2.2%, prev -1.7%) 5:30 pm AUD Reserve Bank interest rate announcement (exp 5.50%, prev 5.50%) 7:30 pm Q3 Real GDP (exp 0.5%, prev 1.3%)

Last week’s dollar story is increasingly being replaced by the yen’s broadening damage, which stabilized in early Monday US trade after the People’s Bank of China indicated its willingness to push for further currency reforms. The statements are interpreted as a signaling by the central bank of near term yuan revaluation. We stick with our forecast for a 1.8-2.1% yuan revaluation against the US dollar in as early s 3-4 weeks.

The morning’s US data will be dominated by October manufacturing output in the Uk and German factory orders, to set the tone for the euro/gbp, followed by an expected upward revision in US productivity and a rebound in US factory orders. The US productivity should take center stage before the Bank of Canada delivers its much anticipated 25-bp rate hike, which depending on the ensuing statement, could deliver fresh damage to the greenback.

Bank of Canada goes for third hike but not last

Today’s expected 25-bp rate hike by the Bank of Canada will lift the overnight rate from 3.00% to 3.25%, the highest since June 2003. This would be the Bank’s third rate hike of the year, and the fifth of the tightening cycle, which began in September 2004. Interestingly, the nature of today’s tightening is not just about inflation. The annual core CPI inflation has stood at 1.7% during Aug-Oct, and remained below the central bank’s 2.0% target January 2004. Especially positive for the loonie is that the real overnight rate (overnight minus core annual CPI) stands at 1.30%, well over the 0.66% monthly average since January 2002. (see chart ). This means that the central bank is well ahead of the inflation curve, which it sees necessary to maintain even with the CAD gaining 3.7% against the USD year to date. Defensiveness ahead of further oil spikes is also amid the BoC arguments for sustaining the current tightening campaign into Q1, as long as the dollar makes modest gains versus its namesake, which could always be inflation-prone in the event of overzealous fuel and commodity prices.



A consistently upbeat post-rate hike statement could well drag USDCAD under the 1.1550, especially as the door is kept open for at least 50 bps worth of tightening in Q1. Downside called up at 1.1520, followed by 1.1480. Upside capped at 1.1630.

Yen pressured anew by politicians

Just when the yen gained nearly a full point in Monday trade to 102.70, selling force remains encouraged by Fin Min Tanigaki’s renewed remarks that the pair reflects fundamentals of the nation’s growth and yield rates differentials. Japan’s Economics and Financial Services Minister Yosano had no impact when he said he expects a gradual emergence out of inflation and reiterated PM Koizumi’s insistence to cap bond down to near 30 trillion yen for the next fiscal fiscal year.

Japanese outflows into overseas bonds have finally stabilized according top last week’s data, showing that local investors were net sellers of foreign bonds at 16.2 bln yen, the first net sale in 9 weeks. Interestingly, the net inflow of 10 weeks ago was only a week interruption of a series of 10 consecutive weekly outflows.

Separately, private think thanks are starting to crank out the preliminary projections for the December Tankan survey on business sentiment due later this month. Business sentiment among large manufacturers is expected to improve for a third consecutive quarter reaching 23, from 19 in the September (Q3) tankan, which would be the highest level since Q3 2004. The estimate represents the average of the predictions issued by the think tanks, each of which sees an improvement from the previous survey. The rest of the tankan indices such as large nonmanufacturers and small manufacturers are also expected to push higher as the rally in stock prices coupled with a falling yen serve as the key ingredients.

Interim resistance starts at 121.30, followed by 121.86. Support starts at 120.70, backed by 120.40.

Euro firms quietly

The multitude of criticism from Euro politicians of last week’s ECB rate hike is proving to be more noise than effect as markets shift back to the data mode. Yesterday’s better than expected 55.2 figure in the Eurozone November services PMI helped the euro maintained composure as the focus gradually shift to the US side, with the productivity revision potentially destabilizing the euro advance. But higher productivity could prove as noninflationary basis for raising the odds of a change in the FOMC language a week from today.

We see EURUSD test the initial resistance at 1.1820, followed by 1.1842—38% retracement of the 1.2172-1.1639 drop. Key resistance stands at 1.1860. Support starts at $1.1720, followed by $1.1655-60.

Following a busy week on the US economic calendar that saw dollar gains on strong durables and consumer confidence figures, this week began with a considerable retreat by the greenback versus the majors. The anticipated dollar decline was triggered by strong services data from the Eurozone, and accelerated in the morning session after a weaker than expected US November services figure. In parallel to subsequent weakness of the dollar against the euro, the yen was lifted by early morning remarks from PBOC suggesting further yuan revaluation. Finally, the expectations of a change of language at the Fed meeting next week aiming to signal the end of interest rate tightening in the US is also possibly the foreseeable dark cloud on the dollar’s horizon.

The US services sector revealed mixed data this morning as the November non-manufacturing index fell to 58.5% after a 60% reading in October. Analysts were forecasting a milder decline to 59.0%. Institute for Supply Management stated that “there is still significant concern about the relatively high level of energy prices and its impact on freight costs and on the prices of other materials and services…"

ISM new orders component rose to 59.5% from 58.2%, and the employment index saw a robust increase to 57% from 52.9%. However, supplier delivery index was seen pointing to mounting bottlenecks, transportation costs were seen higher and prices paid index fell to 74.2% from 78%. Agriculture and finance industries were seen as contracting, while transportation, real estate and entertainment showed to be stable. Overall, 12 of 17
industries were seen as growing, led by mining, legal services and health services.

Energy priced greeted the first New York snow with a rally, as oil extended last week’s gains to break above $60 per barrel. Prices are rising on new expectations of falling temperature in the Northeast of US – the biggest regional consumer of heating oil. In conjunction with higher oil, gold is making its own contribution to inflationary pressures by marking fresh highs above $509 – a 3rd consecutive close above the closely watched $500 level.

Yen benefits from PBOC remarks

A week after being lauded by US Treasury Secretary Snow as a “non-manipulator of currency”, China appears to have answered the call for further yuan revaluation. People’s Bank of China officials, responding to a series of questions published in China Securities Journal, said that “China will deepen yuan exchange rate reforms and further promote the convertibility of currency…” The central bank stated that the revaluation should neither create a sharp impact on trade nor decrease China’s manufacturing advantage.

Further revaluation of the yuan is seen as tremendously beneficial to global economy – a point widely discussed at this weekend’s G7 meeting of finance ministers and central bankers. China had abandoned a policy of a currency peg on July 21 when the yuan was revalued 2.1% and set to float against a basket of currencies.

The yen is perceived to be among the most influenced by yuan adjustment currencies based on Japan’s close trading ties with China. In addition, Bank of Japan would be far less willing to see the yen decline. USD/JPY thus reversed it’s upward course, pulling back to close the session at JPY 120.79 after making fresh multi-month highs at JPY 121.36. Support starts at JPY 120.60 followed by JPY 120.20, while resistance is seen around JPY 121.30.

Euro lifted by improved services and retail sectors

Following last week’s sell-the-fact post ECB rate hike decline, the euro received a fresh infusion of positive data. First, the Eurozone November services PMI came in at 55.2 versus last month’s 54.9 – well ahead of analysts’ expectations of a decline 54.7. This was the highest reading since July 2004. An hour later, the Eurozone October retail sales matched expectations at 0.5% increase after last month’s decline of 0.4%. The two figures propelled the euro above $1.18 to a 1-week high.

Interim EUR/USD support is seen at $1.1780 and $1.1740, while resistance is forming at $1.1820 and $1.1880.

Aussie anticipating RBA interest rate decision

All the Reserve Bank of Australia wants for Christmas is a quiet resolution and limited spillover to last week’s scandal, when one of its board member - Robert Gerard – was forced to resign following revelations that he was being investigated by the authorities for tax evasion. This puts RBA’s treasurer Peter Costello into a political pickle for two reasons: 1)Gerard was one of his key allies; 2) Enduring of criticism of rewarding his political friends despite their record prior to his appointment of the next central bank governor to replace departing Macfarlane. (The Treasurer appoints the Governor and his Deputies at RBA).

Australia’s central bank appears to have plenty on its plate this week and will most likely not depart from its current monetary policy when it announces the decision from today’s meeting, but will instead keep the interest rates at 5.50%. At its last meeting, RBA warned about rising inflation when the headline CPI figure moved to 3% - well above the bank’s 2.5% threshold. However, the bank also stated that this “does not of itself call for a monetary policy response, but needs to be placed in context of the medium-term policy framework”. With recent increase in unemployment, RBA is most likely to preserve its vigilant stance while continuing to “monitor unfolding economic developments and make such adjustments to policy as may be required.”

AUD/USD is supported at.7490 and .7440, while targeting resistance levels of .7540 and .76.

Canadian Dollar hits multi-year high ahead of rate hike

The loonie has continued to gain from rising oil prices and is building further momentum ahead of the expected BoC 25bps rate hike to 3.25% tomorrow morning. The CAD connection to oil prices goes back to 1994 NAFTA that guaranteed Canada’s status a favored supplier to the US. Some may find it surprising that Canada supplies 17% of US oil imports, with Canadian government as the major owner of the country energy resources accounting for 8%.

Canadian dollar is also benefiting from its exposure to Chinese markets, recently becoming China’s second largest trading partner. In fact, a few months ago, China’s President Hu Jintao declared that the two countries recently had formally upgraded their relations to a “strategic partnership.”

These factors are reinforced by BoC’s position as the only central bank that can keep up with the Fed tightening and thus further explain CAD strength. The loonie reached a 13-year high this morning as USD/CAD fell to 1.1548 before pulling back to 1.1570’s. Resistance is seen capped at 1.1595 and 1.1625, while key support is found at psychological level of 1.15.

4:30 am UK Nov Services (exp 56.0, prev 56.1 ) 5:00 am E-12 Oct Retail Trade (exp 0.5%, -0.4%) 10:00 am US Nov ISM Services (exp 59.0, prev 60.0) 1:30 pm Fed Governor Olson speaks 7:30 pm AUD Oct Trade Balance (exp AUD -1.5 bln, prev AUD -1.6 bln)

The yen is being pummeled across the board, hitting nearly 3-year lows against the US dollar, 8 year lows against the euro, Aussie and 7-year lows against the pound as G7 finance ministers and central bankers focused on China’s currency, giving a de facto green light for currency traders to extend the existing sell-off. Four months after China revalued its currency by 2.1% against the dollar, the G7 is no longer content with Beijing’s move towards currency flexibility, which is now deemed too little and too long ago. The yen’s slide was especially intensified by remarks from the Finance Minister Tanigaki and central bank gov Fukui signaling their acceptance of the yen’s losing value.

The yen’s erosion has been attributed to reasons ranging from the lack of hedging by Japanese institutional players buying foreign bonds, to non-Japanese investors’ hedging of their purchases in Japanese equities, both dynamics which are yen negative. The apparent feud between Japanese government officials and the central bank over the ending of quantitative easing policy is also taking its toll on the currency. The central bank has asserted it would end the policy once there is a clear and consistent increase in CPI, while hinting that the country is now ready to head toward that direction. But with another flat reading in the latest CPI, government officials stuck to their guns and said there was no need to rush. The contention then tuned on the interpretation of the headline CPI vs the core figure. As long as the BoJ shows no signs of swaying senior govt officials to their camp, markets will give more weight to the latter’s resistance to ending the policy and extend the dollar rally.

And the fact that US Secretary Treasury Snow has not sounded a wave of a concern with the dollar’s 18% strengthening against the yen when increases of smaller magnitudes have generated protests by US Treasury in the past suggests a resounding silence that only fuels the dollar’s jump.

We also think that Japan’s decision to extend the presence of its defensive army in Iraq is also shaping the US’ silence over the currency arena. PM Koizumi said he would decide during this week’s visit to Iraq.

We see interim resistance at 121.56, followed by 121.86. Support starts at 121 backed by 120.60.

Euro steadies after mixed services PMI

Euro holds around the $1.17 figure amid a strong E-12 services PMI hitting the 55.2 level in Nov from October’s 54.9. But Germany’s Nov services PMI fell to 54.8 from 55.2 (consens at 54.9) while French PMI fell to 56.5 from 56.6. The euro steadies despite Eurozone politicians’ broad criticism of the European Central Bank’s rate hike. It appears that JC Trichet’s assurance that the hike was not going to be followed by concerted actions is helping lend support to the currency.

EURUSD sees initial support at $1.1720, followed by $1.1655-60. Interim resistance stands at $1.1730, followed by $1.1770.

Loonie steadies in rate hike week

Tuesday’s expected 25-bp rate hike by the Bank of Canada should weigh on the USDCAD pair atop the 1.1625-30 territory, especially in the aftermath of last week’s string GDP reading from Canada. Far from being expected to be the final rate hike of the BoC tightening campaign, Canada’s cash rate could be expected to reach 4.0% by end of Q1, especially if the loonie shows no fundamental strengthening past the 1.14 level.

Aussie seen struggling as carry trade cools

We expect this week to be an opportunity for traders to partially scale down some of their carry trades, giving the high yielders in the US and Australia time for retreat. This week’s Reserve Bank of Australia’s interest rate decision is seen producing no change, but the trade GDO data should provide modest interest. We see AUDUSD pulling back to 74.40 interim support, followed by 73.90 – the 38% retracement of the 76.00-72.60 drop. Upside capped at 75.10, backed by 75.40.

Aussie, loonie defy greenback bullishness

The Australian and Canadian currencies were the only major currencies mounting notable increases in bullishness against their US counterparts in the latest report on futures traders commitments, while the euro, pound, swissy all deteriorated in bullishness. The sell-off in the Japanese currency seemed to stabilize only temporarily.

Euro bearishness rose by 63% to a 6-month high of 18,132 contracts after increased certainty that the European Central Bank's December rate hike would unlikely be succeeded by another move. Indeed, the rate hike was did trigger a fresh euro sell-off on Thursday, but was reversed on Friday despite a strong payrolls figure in the US.

Swiss net shorts edged up less than 1.0% reaching a 6-1/2 year high of 48,416 contracts as the carry trade continued dominating currencies especially amid better than expected consumer confidence in the, which fortified the Fed’s tightening course.

Cable net shorts hit a fresh 6-½ year high to 33,087 contracts as speculators added bearishness over the last consecutive 5 weeks.

Yen bearishness stabilized for the second straight week, albeit by a modes amount, off 3% to 64,000 contracts as speculators grew cautious in building up further net shorts while the currency hit fresh 32 month lows against the dollar.

Aussie net longs soared 667% to 5,742 contracts, reaching their best level since October as the emerging carry-trade paradigm for the week rewarded the higher yielding Aussie relative to its US counterpart.

CAD bull wasted no time in reimposing their dominance as net longs soared 85% to 29,010 contracts, one week ahead of an expected rate hike by the Bank of Canada. The loonie is 30 pips away from 13-year highs against the USD.