Markets showed little reaction to an improvement in the US services ISM and the unexpectedly large drop in the weekly jobless claims as traders stayed on the sideline ahead of Friday’s release of the US labor report. The Services ISM survey rose to 59.8 in December from 58.5 in November, pulling a broad pick up across the new orders and employment indices. This followed Tuesday’s services ISM which hit its lowest level in 4 months.

Jobless claims last week fell by 35,000 to 291,000, reaching their lowest since Sep 2001, reflecting an improvement in the jobs market. But the drop could also be a result of end of year holidays preventing filers from claiming jobless benefits.

Payrolls could confuse FOMC picture

Tomorrow’s job report has the potential to either further elucidate the outlook on the Fed’s future moves or further cloud the picture ahead. We expect payrolls to come in at 150K-160K, while average hourly earnings to remain at 0.2%. The hourly earnings figure should also play a major role in shaping the market reaction, especially at a time when inflationary pressures are seen to have largely acquiesced. Another figure at 0.2% or less should weigh on the greenback. We expect a payrolls number above 250K to drag the euro to no more than $1.2025-30 USDJPY at 116.60.

With futures markets pricing over a 90% chance for a 25-bp rate hike this month and about a 45% chance for a similar move in March. We expect the downward dollar impact from a weak report to be greater than an upward impact from a strong report because any jobs strength in January is seen as too early to impact the Fed’s decision-making in March. A figure of 180-150K is expected to be dollar negative, as markets begin to magnify the possibility of a Fed hold in the January meeting. Some media reports are beginning to circulate stories that the Fed may have already finished raising interest rates pointing to stabilizing inflation (CPI and PCE) and weakening services ISM.

EURUSD lingers between 100 and 200 day MAs

EURUD hovers between the 100 and 200-day moving averages during a day where improving US data were welcomed with relative serenity, emphasizing the increasingly dollar-negative bias emerging in the past 3 trading days. With the yield curve flirting with inversion and the FOMC mulling the end of tightening, dollar bulls are growing increasingly averse to a pushing the bid button.

We showed yesterdays’ EURUSD chart that the pair has finally broken above its 100-day MA ($1.2005) after 4 previous failures of doing so. Drifting around the $1.2120s, EURUSD faces pressure at $1.2150, followed by $1.2175. Key resistance stands at 200 day MA at $1.2218 also the 61.8% retracement of the 1.26-1.1639 move. Support starts at $1.2060, followed by 1.2010.

CAD plunges on sharp IVEY drop

CAD dived by 2 full cents to US$1.1650 after Canada’s IVEY business survey plunged to 48.3 in December from November's 65.8, breaching expectations of a 62.7 figure. It was the worst showing since July 2003, when purchasing managers were pessimistic due to the SARS outbreak. Respondents blamed the strengthening currency and worries about the US economy.

Tomorrow’s job report from Canada could also playa role in shaping the USCAD pair. Forecasts expect a 21K rise in payrolls after a 30.6K rise in November with the unemployment rate seen flat at 5.0%.

We see USDCAD retesting support at 1.1570, backed by 1.1520. Upside capped at 1.1660.
Key pressure held at 1.17—the 50% retracement of the 1.1970-1.1424.f

At 8:30 AM US Weekly Jobless Claims At 10:00 AM US December non-manufacturing ISM (exp 60.0, prev 58.5) Canada December IVEY PMI (exp 62.7, prev 65.8)

The dollar recovered slightly off its earlier lows in London trading, pushing to session highs against the euro and yen. Traders will look ahead to US December services ISM, forecasted to improve to 60.0, up from 58.5 from November. Also slated for release today will be crude oil stocks from the EIA for the week of December 30. Consensus forecast is for it to drop to 1.2 million barrels.

The PBOC announced that it would expand its M2 money supply target for 2006 to 16%. China’s central back also said it aims to perfect the Yuan float mechanism based on its own decisions, and will keep the currency stable at a rational and balanced level. Recall yesterday the PBOC set the Yuan at the highest rate vs the US dollar at CNY 8.0702 per $1USD, the highest level since the July revaluation.

Euro maintains overall buoyant tone

The euro pressed forward against the dollar, yen and sterling in overnight trading. The EUR/GBP pair eked out a fresh 5-month high at 0.6907, while EUR/JPY climbed to a multi-week high at 140.86. Bolstering the single currency across the board were strong Eurozone December services PMI, which beat both the November’s reading of 55.2 and the consensus forecast of 55.4, rising to its highest level in nearly 2-years at 56.8. Most notable was the services employment component, which rose to 52.6, its highest level since July 2001.

EURUSD continues to trade near the 1.21-mark, with resistance eyed at 1.2130-40, backed by 1.2170 and 1.22. Additional resistance is eyed at 1.2240, followed by 1.2280. Support starts at 1.2050, backed by 1.20 and 1.1970. Subsequent floors are seen at 1.1940 and 1.19.

EURJPY further extended gains, climbing to a multi-week high at 140.85. Resistance is seen at the November 3rd peak of 141.15, followed by 142 and 142.80. Key resistance is eyed at the December high of 143.60. Support starts at 140, backed by 139.60 and 139.20. Additional floors will emerge at 138.70 and 138.15.

Services activity robust in UK

The UK CIPS services activity index was unexpectedly stronger for December, beating estimates of a rise to 56.0 and the November reading of 55.8, jumping to 57.9 – which marked its highest reading since April 2004. The employment index also edged up to 52.3, from 51.2, it’s highest since August, while the new business index improved to 58.3 from 56.3.

Cable hovers near 1.7560, with resistance seen at 1.76 backed by 1.7650 and 1.77. Additional ceilings are seen at 1.7750 and 1.78. Support starts at 1.7530, followed by 1.75 and 1.7450. A move lower will target 1.74, followed by 1.7340 and 1.73.

Jawboning in Japan

With the strengthening of the yen against the dollar to recent highs, Japan MoF’s Vice Finance Minister for International Affairs, Hiroshi Watanabe attempted to talk the currency lower. Watanabe said forex moves have been rough from the year-end to the New Year, adding that government officials will be closely watching the market.

Dollar/yen meandered beneath the 116-handle, but regained its footing during the London session. The pair will face initial resistance at 116.45, the session high, followed by 117 and 117.50. Key resistance is eyed at 118.15. Support starts at 116, backed by 115.50-60 and 115.

Dollar selling stabilized in European and US trade after a drubbing in the Asian session. One day after the US December ISM manufacturing index hit a 4-month low, US factory orders rose 2.5% in November, in line with forecasts thanks to a 15.8% rise in transportation equipment and a 134.3% jump in civilian aircraft and related parts. Excluding transportation, orders were unchanged from the previous month, while orders for cars and machinery dropped. The data helped the dollar regain some ground after losing further ground in the Tuesday Asian session.

EURUSD breaks elusive 100-day MA to $1.2144

Euro broke past the 100-day moving average for the first time in 4 months, accumulating a 3.5 cent gain in 2 days, the biggest 2-day rally in 4 months. The preliminary estimate for Eurozone annual inflation is expected to be 2.2% in December 2005 according to Eurostat, which is down from 2.3% in November. Since the flash estimates have 47% rate of accuracy over the past 2 years, with 52% of the cases diverging by 0.1.

The chart below shows the euro to have finally broken above its 100-day MA ($1.2005) after 4 previous failures of doing so. The currency hovers around the $1.2120s, facing next resistance at $1.2170. Key pressure follows at the 200 day MA at $1.2218. Support starts at $1.2060, followed by 1.2010.



USDJPY stabilizes off 3-week low

USDJPY recovered nearly a full yen off its 115.70 low, partially helped by stronger than expected factory orders in the US. The dollar’s damage began during the NY Tuesday session and intensified in the evening after the People’s Bank of China sets the yuan at the highest rate vs the US dollar at CNY 8.0702 per $1USD, the highest level since the July revaluation. Although our forecast of a Q4 revaluation did not materialize, we expect the PBOC to resort to other means of gradually lifting its currency, such as a rate hike in its discount rate or further crawling announcement of higher fixing rates. The impact of either moves promises to be dollar negative via an overall rally in Asian FX, that should transpose into the European FX as well as the commodity currencies.

Although the US fed funds rate is expected to be lifted to 4.50% later this month--further pushing away from Japanese rates—the 50-50% prospects that the January move will be the last could accelerate the unwinding of the dollar-yen carry trade, especially amid improved chances of a policy tightening by the Bank of Japan.
USDJPY faces key support at 115.30—the bottom of the 7-month long upward channel, a break of which becomes major at 115. The 200 week MA follows at 113.75, which stands next to the 38% retracement of the 101.61-121.36 rise.

At 10:00 AM US November Factory Orders (exp 0.8%, prev 2.2%)

The dollar extended yesterday’s losses as selling accelerated sharply in early Wednesday trading with traders pushing it to a fresh 2-month low against the euro just shy of the 1.21-level. Still reeling from the disappointing manufacturing ISM data and the minutes of the FOMC meeting, the greenback also slumped to a session low of 115.60 versus the yen and 1.7565 against the sterling. With the Fed signaling the possible end to its tightening cycle, traders reassessed their portfolio holdings. Meanwhile, gold rallied to a 3-week high in overnight trading, climbing above $535/oz.

The economic calendar is light today, with the release of only November factory orders, which are forecasted to drop to 0.8% for November, down from the prior month’s reading of 2.2%. Nevertheless, traders will be eyeing the key headline data this week, Friday’s December jobs report.

Euro Powers Ahead

The euro was the biggest winner of the session, surging to a 2-month high against the dollar near the 1.21 mark and rising past the 140-yen level for the first time since early December. Data released earlier showed Eurozone’s December inflation slowing to 2.2%, down marginally from 2.3% a month earlier.

EURUSD climbed just shy of the 1.21-level before backing away to where it currently hovers, near 1.2060. A breach of the 1.21 resistance level will target 1.2130, backed by 1.2170 and 1.22. Subsequent ceilings will emerge at 1.2240 and 1.2280. Interim support starts at 1.2050, followed by 1.20 and 1.1970. Additional floors are eyed at 1.1940 and 1.19.

EURJPY rallied past the 140-level, reaching a multi-week high at 140.36. Resistance is seen at the November 3rd peak of 141.15, followed by 142 and 142.80. Key resistance is eyed at the December high of 143.60.

USDJPY revisits lows, Nikkei maintains strength

Traders of Japanese equities maintained their bullish tone on the first session of the New Year, pushing the Nikkei to another multi-year high. The Tokyo index closed up 1.6%ff, marking its highest close since 2000 at 16,361.54. A key factor driving the latest rally was the prospect of the Fed soon nearing the end of its tightening cycle, which would be beneficial for Japanese exporters.

Dollar/yen fell to a multi-week low during Tokyo trading around 115.60, but has since recovered back above the 116-level. The pair will face initial resistance at 116.40, the session high, followed by 117 and 117.50. Key resistance is eyed at 118.15. Support starts at 116, backed by 115.50-60 and 115.

Sterling continues to shine

The Bank of England reported UK consumer credit for November, which fell to 927 mln sterling, down from 1.21 bln sterling from the previous month. Economists were forecasting a rise to 1.3 bln sterling, instead the figure dropped to its lowest level since December 2000.

Cable continued to outperform, climbing to a day high at 1.7565. Resistance is seen at 1.76, followed by 1.7650 and 1.77. Support begins at 1.7530, backed by 1.75 and 1.7450.

The dollar fell across the board, posting its biggest single day point drop against the euro in 3 weeks after the manufacturing ISM fell to a 4-month low, lending further credence to the slowdown story in the US that may become affirmed by an ensuing inversion in the yield curve.

The December ISM manufacturing index fell to 54.2 from 58.1 and 59.1 October, falling below expectations of a 57.4 reading. The report showed broad decline, including a drop in the price paid index to 63.0 from 74.0. The hiring index fell to 52.7 from November's 56.6, while the new orders index dropped to 55.5 from 59.8.The inventories index fell further into contraction territory to 47.2 from 49.3, which should show whether a rebound related to inventory replenishment is in the cards.

The Federal Reserve issued the minutes of its December 13 meeting, in which it changed the language of its policy statement hinting that any future tightening can no longer be assumed to be automatic and is only a function of the discretion of the Fed, which is dependent on the upcoming data. The minutes affirmed that: "Although future action would depend on the incoming data, this characterization of the outlook for policy was seen by most members as indicating that, given the information now in hand, the number of additional firming steps required probably would not be large".

The combination of a weak ISM and the release of the FOMC minutes kept the odds of a 25-bp January rate hike as high as 100%, which pushed the yield curve off its inverted formation. 10-year yields ended at 4.37% while their 2-year counterparts slipped to 4.33%. We stressed last month that the Fed will conclude raising rates in January at 4.25%, followed by an easing in Q3.

EURUSD rebound tests elusive 100-day MA

The 2-cent jump in EURUSD was the biggest since Dec 13, which was the same day the Fed changed the language in the FOMC statement and allowing for the possibility of a near-term pause in its tightening campaign. The pair has reached the 100-day MA at $1.2004, but as the chart shows, the pair failed to break above the average in each of the 4 occasions it neared it. A breach above $1.2020, will pave the way for $1.2060 as the next resistance level. This level also rests above the 3-month trend line resistance of $1.205. Preliminary support stands at $1.1970-75, backed by $1.1950.

Tomorrow’s release of the Dec CPI from the Eurozone is expected to remained unchanged at 2.2%, but we could see modest retreat in the event that the figure is revised below 2.1%. Any reading above 2.2% should propel the euro’s positive momentum.



CAD shrugs further political troubles

Weak US data and Canada’s improved fundamentals shielded the Canadian currency from the latest round in political scandals. The Royal Canadian Mounted Police are investigating whether finance officials leaked key tax policy information in November, ahead of an official announcement. Opposition parties from the Conservative front are calling for the resignation of Finance Minister Ralph Goodale to resign. The standing of both parties will be closely scrutinized ahead of the Jan 23 election especially as the probe is taking a toll on the incumbent Liberals. A poll conducted for The Globe and Mail newspaper and CTV News showed the Liberals had the support of 33% of adult Canadians, with the Conservatives at 31%, while an Ipsos-Reid poll on Monday put the Conservatives slightly ahead with 33% support compared with 32% for the Liberals.

Nonetheless, this is not the first time political news in Canada is failing to have an impact on its robust currency, especially as it is propped by the rebound in oil and gold prices. Further bolstering the loonie is the interest rate outlook, whereby the Bank of Canada is seen raising pushing rates to 3.75% by quarter-end, narrowing the yield disadvantage with the US dollar to an expected 75-bps from the current 100-bps.

USDCAD dropped a full cent toward the 1.1550s, with any rebound seen limited at 1.1620. Further downside seen testing 1.1520, backed by 1.1460.

At 10:00 AM US December Manufacturing ISM (exp 57.0, prev 58.1) At 2:00 PM US Minutes of FOMC Dec 13 Meeting

The dollar was slightly weaker against the majors in the first trading session of 2006, sliding past the 1.73-level versus the sterling and retreating back toward the 117-handle to the Japanese yen. The main driver in currency moves this week will be the release of several key economic reports. Most notable are US manufacturing ISM, the minutes of the December 13 FOMC meeting and the highly scrutinized US labor report.

Due out today include December manufacturing ISM and the minutes of the December 13 FOMC meeting. The headline manufacturing reading is forecasted to drop slightly to 57.0, down from 58.1. Meanwhile, traders will also be eyeing the release of the FOMC meeting minutes, scheduled for 2:00 PM, for any change in language from the previous minutes. Although the Fed is expected to lift its benchmark rate by another 25-bp points at the end of the month, many will be scrutinizing the minutes for clues as to when the tightening cycle will end.

China moves to OTC yuan trading

The PBOC announced on Tuesday that it will begin over-the-counter trading for the Yuan starting January 4th. The move is another signal of China shifting toward a currency regime of greater flexibility. The Bank said it would improve upon the central parity of the Yuan, announcing the central parity against the US dollar, euro, yen and Hong Kong dollar each day. Nevertheless, the PBOC maintained its 0.3% trading band for the Yuan.

Robust econ data from Germany and Eurozone

Germany’s seasonally adjusted jobless fell by 110,000 in December to 4.638 mln, a sharrp contrast to the expected 11,500 drop by economists. The unemployment rate improved to 11.2% down from 11.4% from November, which marks the largest monthly decline in 15 years. Germany’s Labor Office Chief Weise lauded the report, saying recent months’ jobs data give hope for 2006.

Separately, the December Eurozone manufacturing PMI posted its highest reading since August 2004 at 53.6, besting for forecasts of 53.3 and November’s 52.8. Particularly worth noting are the new orders and employment components, which rose to 56.0 – its highest since July 2004, and 50.3 – its first job growth reading since May 2001, respectively.

However, the upbeat data failed to provide any significant bounce in the euro. EURUSD backed away from the 1.19-level and continues to hover near 1.1875 heading into New York trading. Support starts at 1.1840, backed by 1.18 and 1.1760. Subsequent floors are eyed at 1.17 and 1.1640 – the pair’s recent multi-month low. A move beyond the 1.19-handle will target 1.1940, followed by 1.1970 -- which marks the descending trendline connecting the peaks from March 11, 2005 at 1.3480 and Sept 2, 2005 at 1.2587. Additional resistance is eyed at 1.20 and 1.2050.

UK manufacturing slower than forecast

The December CIPS manufacturing PMI inched up slightly to 51.1, from 51.0 in November, but just below consensus estimates. The input prices climbed to its highest level since March at 61.9, compared with 59.0 from November. The employment index remained mired in contraction territory at 46.9, albeit slightly improved from 46.6 in the previous month.

Cable retreated from the session high at 1.7338 and hovers near 1.7275. Resistance is seen at 1.73, followed by 1.7340 and 1.7380. Support is eyed at 1.7240, backed by 1.72 and 1.7150. Additional support is seen at 1.7120 and 1.7070.