US non-farm payrolls grew by 108,000 in December from a revised increase of 305, 000 in November, while the unemployment rate held fell to 4.9% from 5.0% and average hourly earnings edged up to 0.3% from 0.2%.The revisions for October and November showed a 71,000 increase and a 19,000 decrease respectively, netting an upward revision of 52,000.
The December performance failed to keep up with November’s stellar 305K increase, which was the highest since April 2004. The all-industry slowdown was highlighted in construction, services, hospitality/leisure and government jobs. The 156K slowdown in services jobs was the biggest in 6 years, accounting for the bulk of the slowdown in the overall report. This may reflect the aggressive creation of jobs in the hurricane afflicted areas of the South over the October-November periods.

The 9K net drop in construction jobs was the first monthly loss of jobs since February 2004. This followed the 42K rise in November, which was the highest in 7 months. A strong rebound in January construction cannot be ruled out, and is largely dependent on weather conditions.

Meanwhile, the upside surprise in the report was the 18K increase in manufacturing, largely due a 15K increase in durable goods industries. This is the third monthly increase in manufacturing jobs, a feat not attained since spring 2004, when monthly payrolls averaged a creation of 300K jobs.

Average hourly earnings rose by 5 cents in December to $16.37, registering a 0.3% increase from November’s 0.2% monthly increase. The year-to-year reading registered a 3.3% rise, the highest since February 2003 when oil prices soared amid mounting uncertainty ahead of the Gulf War II.

Why today’s payrolls report would not have mattered for the dollar





The 71K upward revision in the November jobs report may have offset the weaker than expected December figure (108K vs expectations of 200K), but the final outcome has deepened the dollar gloom.

EURUSD is less than half a cent away from regaining its 200-day moving average, a feat not attained since May 2005.

USDJPY is near is 20 pips (2/10 of a yen) above its 200-week average, and 40 pips above the 38% retracement of the rise from the 101.66 low (Jan 2005) to the 121.36 high (Dec 2005). Even if the Bank of Japan does not signal any near term undoing of its quantitative easing policy, the pair is expected to be hit by Chinese currents. Whether it is a subsequent Yuan revaluation, announcing a higher daily rate of the CNY/USD rate, or the eventual diversification into nonUSD FX, the USDJPY pair should eye the 109.00 level by mid quarter.

Today’s payrolls report would not have mattered for the recently damaged US dollar. Considering the 95% probability of a 25-bp rate hike in January priced by the market prior to this morning’s report, a strong reading would naturally not have altered that probability. And given the fact that the following FOMC meeting is nearly 2 months away from today, it is too far ahead to make predictions far out based on a jobs report from December—which is 3 months lagged. Besides, going into the March 28 meeting, markets and the Fed would be equipped with data from the January and February labor reports, which reduce the relative importance of today’s numbers.

Given the considerable certainty of a January 31 rate hike (current market probability at 80%), the probability curve can only change towards a decision to hold, a rude awakening for the dollar.

As for the Fed March 28 meeting (where we continue to expect no move), it remains too far ahead to serve as a reliable foundation for dollar bulls, especially given the Fed’s increasingly data-dependent stance. If anything, the odds for a no change would likely increase the current 40-45% probability—again another dollar negative outcome.

At 7:00am Canada December Net Change in Employment (exp 20.0k, prev 30.6k) Canada December Unemployment Rate (exp 5.0%, prev 5.0%) At 8:30am US December non-farm payrolls (exp 200k, prev 215k) US December Unemployment Rate (exp 5.0%, prev 5.0%) US December average hourly earnings (exp 0.2%, prev 0.2%)

Trading in the currency market slowed overnight as many remained on the sidelines ahead of the US December labor report, slated for release at 8:30 AM. The dollar continued to trade on a weaker footing against the majors, albeit within a close range.

Today’s key jobs report has the potential to either further elucidate the outlook on the Fed’s future moves or further cloud the picture ahead. Forexnews 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.

Euro Steady Near 1.21

The Eurozone unemployment rate held steady in November, unchanged at 8.8% and the 3-month average at 8.3%. The highest unemployment rates in the Eurozone belonged to the two largest economies, Germany and France, at 9.3% and 9.2%, respectively. Eurostat

EURUSD hovered in a narrow range around the 1.21-level, 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.

Loonie mired near lows ahead of labor report

Also due out today will be Canada’s December labor report, which has been overshadowed by its US counterpart. Nevertheless, the unemployment rate is seen holding steady at 5.0%, while the net change in employment is seen declining to 20.0k down from 30.6k.

USD/CAD edged up higher, rising to 1.1676. Resistance is seen at 1.17, followed by 1.1750 and 1.18. Additional gains will target 1.1840 and 1.1910. Support starts at 1.1620, backed by 1.1575 and 1.15.

Sterling Edges Higher

Cable crept up slightly higher in a quiet trading session, inching up to a day high at 1.7572. Resistance is 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.

USDJPY holds above 116

A test below the 116-level was limited to early Tokyo trading. USDJPY has since held steady above and will target 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.

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.