Following yesterday’s sell-off, the greenback was largely unmoved against the majors as currency traders showed increasing reluctance to enter into new positions ahead of the upcoming busy week. The euro is determined to preserve this week’s gains while approaching the highest weekly close in over a month. The yen is also showing resiliency as it looks to stem the tide of a 12-point drop in a period of just 3 months. Meanwhile, the pound and the Swiss franc are in consolidation of yesterday’s near-200-pip moves that dealt USD substantial technical damage.

US Consumer sentiment, as measured by University of Michigan's preliminary index, continued to show an improvement, coming in at 88.7 in December after a reading of 81.6 last month. November’s increase telegraphed a jump in consumer confidence as measured by the Conference Board, which easily topped last month’s expectations of 90.0 with a reading of 98.9. A gradual return of consumer sentiment to levels seen before this summer’s hurricanes, 96.5 in July being the highest, is seen as beneficial to the dollar when considering that US consumer spending represents 70% of the economy.

On the downside, the Commerce Department reported that inventories at US wholesalers rose only 0.2% in October, below analysts’ expectations of 0.5%. Sales were seen rising 1.2%. October wholesale sales were particularly weak as compared to strong gains of 2.4% in September and 1.8% in August. Consistently declining inventories are seen as largely negative for the economy, signifying companies’ rush to adjust production and stock levels in the face of expected diminishing demand growth.

On tap for the US economic data is Tuesday’s expected rate hike by FOMC on Tuesday, where traders will pay close attention to whether the Fed will change its language to signal a shift in its tightening bias. The trade balance on Wednesday and inflation data on Thursday are also among the highlights for next week’s busy schedule. Finally, Friday marks the release of US Q3 Current Account numbers, which are expected yet again to show a deeper deficit of $204.6 billion.

Euro digesting mixed ECB rhetoric, consolidates gains

The euro gave up some of yesterday’s gains overnight following the release of lower than expected October Current Account and Trade Deficit figures from Germany. The former came in at 6.4 billion euro, below consensus estimates of 7.0 billion euro as well as September readings of 7.4 billion. The latter had also declined from September’s 15.0 billion euro level to 12.2 billion – below the expected decline to 14.1 billion. However, single currency than bounced back above $1.18 from yesterday’s base of $1.1765 to close the week at $1.1818.

Persistent key resistance at $1.1841 – 38.2% retracement of $1.2170 – $1.1640 drop is once again an interim target for the pair. That level is followed by $1.1902 – near term high as well as 50% retracement of the said move. Support levels remain at $1.1785 followed by $1.1735.

Traders turn their attention to news from the US side of the pair next week after the ECB policy board members hinted at the possibility of further tightening yesterday. Those statements countered the remarks from several finance ministers from the Eurozone and the IMF officials who warn against subsequent rate hikes.

Yen rebound slowed by weak GDP

Last night’s lower than expected GDP report stalled the yen rally that followed BoJ Governor Fukui’s call for ending the central bank’s policy of quantitative easing based on the rise in the core consumer price index. Japan’s Q3 GDP came in at 0.2%, weaker than the expected 0.5% and also lower than the previous figure of 0.4%. USD/JPY rose 30 pips on the session to end the week at 120.62 after briefly dipping below the 120 level in yesterday’s drop. Interim support is still seen at JPY119.95 and JPY119.25. Firm resistance persists at JPY121.

Canada’s capacity, productivity increase

The markets are getting accustomed to positive economic data from Canada, with another round of robust figures this morning justifying this week’s hawkish commentary that accompanied BoC rate hike. Today’s data confirms central bank’s statements that Canadian economy is operating at “strong output growth” as Q3 capacity utilization was seen higher again at 86.9% - above the previous quarter’s 86.7%. Increase of production from Canada’s labor force is largely responsible for the improvement as demonstrated by greater Q3 productivity. This morning’s productivity reading of 0.8% is the highest it has been in nearly four years.

USD/CAD dropped 30 pips after the productivity numbers, finishing the week at CAD1.1570. Interim support remains at CAD1.1560 and CAD1.1530 levels. Resistance is still seen at CAD1.16 followed by a key level at CAD1.1640.

Next week shall be the last full trading week of the year, but it will also be one of the most crucial if not most-data-event filled weeks of the year. In the US alone, markets will start off with Tuesday’s FOMC meeting and November retail sales, followed by Wednesday’s release of the October trade balance. Thursday’s quadruple treat of the November CPI, October TICS data on net foreign capital flows, November industrial production/capacity utilization and the December Philadelphia Fed survey should provide a market moving mix of data on external accounts, manufacturing activity and inflation pace. Friday’s release of the Q3 current account deficit should give a more comprehensive picture, but be ware of a one-time improvement in the report due to the payments by overseas insurers and unilateral transfers related to hurricane relief.

Will the Fed Change Tact?

Next Tuesday’s FOMC decision should produce the 13th rate hike of the 18-month long tightening campaign but it is the wording of the FOMC statement that once again should capture the interest of the markets on the basis that the Fed may need signal a near-term conclusion to the campaign. The importance of communicating a discreetly conveyed a message rests on fine-tuning the bond market reaction, without causing a bullish stir in equities or provoke interest renewed rate-driven optimism into the housing market.

The first question in mulling the Fed’s statement is what reasons does the Fed have to signal a break in the current tightening? The second question is what changes should be signaled without the central bank placing itself in a policy bind from which it would be difficult to exit? Recall that the minutes of the November FOMC meeting triggered a broad dollar sell-off last month when they indicated that: “Some members cautioned that risks of going too far with the tightening process could also eventually emerge" and that “…policy setting would need to be increasingly sensitive to incoming economic data”

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.”
It’s also worth noting that the latest Beige Book—released 8 days after the market-moving FOMC minutes – indicated that the Fed is increasingly nearing its objectives of stabilizing prices and cooling the housing sector without hampering growth. The description of consumer prices shifted from an overall pick up in the previous survey to “stable” and “modest increases” in the latest survey, while real estate changed from “all the districts …noted rising demand for office, retail, or industrial space” to “Residential real estate activity was reported to have moderated in many Districts”.

Considering the cooling in housing sales (new and home), the stabilization in energy prices and the ensuing stability in inflation (core PCE and core CPI both retreated to 2.0% y/y from their 2.2% and 2.4% respective highs for the year), it is fit for the FOMC to spell out a change by either introducing a time element to the pace at which accommodation is removed, or spelling out its data dependence as the basis of the continuation of its measured tightening.

What we suggest

Accordingly, we suggest the Committee could substitute the long standing phrase: "…the Committee believes that policy accommodation can be removed at a pace that is likely to be measured" with the following phrase: "the Committee believes that policy accommodation has neared a level that is deemed to be neutral consistent with the balanced objectives of both sustainable growth and price stability". Then it would maintain the ensuing sentence indicating the Committee will respond to changes in economic prospects as needed to fulfill its obligation of price stability.

Making such a rhetorical change does not preclude the Committee from raising rates in January or February as long as it hedges it self with our suggested phrase of:” policy accommodation has neared a level that is deemed to be neutral”. A rate hike in January would push up rates to 4.50%, which is in line with San Francisco Fed president Janet Yellen’s own estimate of a neutral policy, which she put at 3.50%-5.50%.

The knee-jerk reaction of any change in the statement should be dollar negative as was the case after the release of the Nov 22 minutes, when the EURUSD gained as more than a full cent and the yen pushed up over 70 pips. Carry trade enthusiasts are eyeing any change in signals from the Fed that would add some finality to the accumulation of the dollar’s yield luster. Such a change would signal this possibility and erode call up the $1.19 level in the euro and 119.30-50.00 yen level.

With the Bank of Canada leaving the door open for as many as 50 bps of tightening in Q1, and the ECB with at least 25 bps in the same period, the unwinding of the carry trades could never be worked out so accurately. Rising expectations for the end of Japan’s deflation by end of March and could also reestablish the hedging of long dollar positions by Treasury-bound Japanese as the US yield curve would likely begin steepening when the Fed reaches a pause.

The ECB’s own version of “measured” tightening

Although ECB president Jean-Claude Trichet asserted that last week’s 25-bp rate hike was not necessarily going to be followed by a series of similar moves, Thursday’s series of hawkish remarks from the Irish and German central bankers as well as earlier comments from Chief economist Issing, clearly pushed back the door open for further tightening. The ECB officials explicitly stated that further deterioration of the price outlook would have be addressed with a rate hike at any time. This was also a clear message to the increasingly vocal politicians, who have expressed their unanimous opposition to last week’s rate move.

We believe that one variable that is hardly mentioned (but largely mulled) by the ECB in addressing price stability is the euro’s exchange rate. Should the EURUSD pair remain within the range of the last 5 weeks ($1.1670-1.1900) then a cheap currency is more likely to lubricate the Euro inflationary machine and trigger a rate hike as early as January. If on the other hand the currency rises past the $1.20 figure and maintains its 7-year high run against the yen, then a rate hike is expected to be less tenable.

US Dollar fell across the board today as central bank officials from both Japan and the Eurozone were seen as making a case for tightening in their monetary policy. BoJ Governor Fukui pointed to new evidence suggesting that deflationary forces in Japan have been curbed. In turn, the ECB officials were more vocal than ever about the positive impact of the recent tightening on Eurozone growth, suggesting that further rate hikes may be forthcoming. Meanwhile, sterling was catapulted by the BoE’s decision to keep interest rates at 4.5% despite persistent weakness and deteriorating fundamental data from the UK.

On the US side of the economic calendar, the dollar was wounded by an unexpectedly high number of weekly jobless claims. First-time unemployment filings rose to 327k from upwardly adjusted last week’s figure of 321k. The Labor Department also reported an addition 7k attributed to jobs lost due to the impact of the hurricanes. The four-week average remained virtually unchanged at 322.5k.

ECB defends rate hike, growth seen as supported

The ECB issued a rosy assessment on the economy following this month’s tightening, stating that "the monetary policy of the ECB remains accommodative and continues to lend considerable support to sustainable economic activity and job creation." Furthermore, the central bank pointed to the strengthening economic growth in the 2nd half of this year and beyond in spite of inflation being at the upper range in the short term.

Meanwhile, a host of ECB officials are countering this week’s statements by a number of European treasury ministers calling for the central bank not to tighten further. ECB chief economist Ottmar Issing said that while this month’s raise does not necessarily signal a series of hikes, he stressed that the central bank could act on interest rates “at any time.”

Germany’s ECB governing council member Axel Weber’s statements carried a more determined message. "In our overall medium term outlook, clearly the price outlook has strongly deteriorated and this is uncomfortable for the central banks," he said, adding "we must avoid that these oil price effects lead to second round effects and lead to an un-anchoring of inflation expectations."

Ireland’s John Hurley, ECB Governing council member, echoed these hawkish remarks with an assessment of “implementation of mandate (being) supportive of growth”. It should be emphasized that price stability first and foremost is among the primary mandates of the ECB. Hurley further pointed out that the central bank is vigilant on inflation, as it continued to monitor price levels closely.

This morning’s October industrial production from Germany came in higher than expected at 1.1% increase versus analysts’ consensus of 0.5%. Recovery in the industrial sector resonates with this week’s figures indicating resurgence of the European manufacturing as both Germany and Eurozone reported an improvement in their PMI reports.

EUR/USD rallied as high as $1.1848 before correcting to $1.18 by the end of the session. Subsequent resistance targets are seen at $1.1860 and $1.1890, while support is shaping at $1.1785 followed by $1.1735.



Fukui signals increase in price levels, defeat of deflation

Bank of Japan governor Fukui is once again seen as making preparations for ending the central bank’s quantitative easing policy. Today, he pointed to expectations of clear year-on-year rise in the January-March quarter in the core consumer price index. Previously, BoJ’s concern over extending monetary status quo further was challenged by PM Koizumi and rebuffed based on last quarter’s flat inflation figures.

Tonight’s expected increase in Q3 GDP report should further illustrate liquidity-fuelled recovery of Japan’s economy. Analysts’ expectations are calling for a 0.5% increase versus the previous reading of 0.4%.

USD/JPY fell on Fukui’s renewed hawkish stance, anticipating a clearer sign of a timeline for interest rate tightening. The yen gained nearly 70 pips against the dollar to end the day at JPY 120.32. Further support is now seen at JPY 119.95 and JPY 119.25. Firm resistance is met at JPY121.

BoE leaves rates unchanged, Sterling soars

For the 4th consecutive time, the Bank of England stood pat on the interest rates, preserving 4.50% level intact. The decision was widely expected despite the continued deterioration in UK fundamentals and subsequent easing of inflationary pressures spurred by a downturn in economic activity.

The business sector was largely seen as frustrated by the decision not to cut rates, with the spokesman for the British Chambers of Commerce David Frost calling for an easing in borrowing costs. "British business is disappointed that the MPC's felt unable to take decisive action to counter the worsening economic situation," he said, adding that "waiting too long before taking corrective action could be dangerous and…. cause long-term damage." Bank of England does not release an accompanying statement with its decisions, and any evidence concerning the central bank’s outlook on the economy is concealed until the minutes are released on December 21.

Sterling rallied in the hours prior to the central bank announcement and moved to the upside again later on in the session. It ended the day over 180 pips higher against the greenback, taking out key near-term and medium-term trendline resistance levels as well as the 50-day moving average. Key resistance at $1.76 followed by $1.7670 is coming into focus, while support is firm at $1.7450.



Loonie lifted by strong housing data

Canadian housing sector shed the stigma of a decline with a fresh doze of positive news this morning. Canada’s November housing starts rose 7.4% to 222.1k from last month’s 206.8k, exceeding expectations of 220k. Higher priced construction material, labor, and fuel contributed to a 0.7% rise of the October new housing price index, higher than both last month’s 0.6% and the consensus estimate of 0.4%. Earlier this month, Canada’s housing starts and building permits data both showed deterioration.

The loonie cheered strong housing report with a 40-pip decline to CAD1.1572 in USD/CAD after the release of the numbers. Interim resistance is found at CAD1.16 followed by a key level at CAD1.1640. Support is seen at CAD1.1560 and CAD1.1530.

Swiss franc rallies to 1-month high

USD/CHF traded as low as CHF1.2966 – nearly 200 pips lower than the session high – prior to reversion back above CHF1.30 at the day’s close. This marked the lowest level since November 4th while also breaching the 50% retracement from CHF1.27 to CHF1.3282 move. Key support is seen at CHF1.2920 – 61.2% retracement of the said move. Resistance is shaping at CHF1.3025 followed by CHF1.3080.

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.