n a rather quiet trading day, the dollar managed to edge higher in the New York session against the euro and sterling. Currency markets took a breather on Tuesday ahead of key US economic data slated for release later this week. Traders are likely awaiting both the trade balance and producer price index data prior to initiating the next big move in currencies. It will be interesting to see if the recent recovery in the dollar is merely a reprieve, or whether there will be further gains in store.

Germany’s ZEW soars, Euro little changed

Germany’s ZEW economic expectations indicator jumped to 71.0 in January, up sharply from 61.6 in December and beating consensus forecast of a rise to 65.0. The improvement sent the ZEW survey to its highest level in two-years. There were a myriad of improvements within the survey, including the German current conditions indicator, which improved to -31.6, from -44.4, as well as the Eurozone expectations indicator, rising to 66.1 compared to 51.2 in the previous month. Commenting on the upbeat report, the ZEW institute attributed January’s gains to a rise in manufacturing orders which points to strong domestic and foreign demand. The ZEW chief Franz added that the outlook for 2006 was clearly improving, suggesting it’s a sign of confidence in economic policy.

The euro received an initial boost from the upbeat ZEW figure during the European session, but slowly drifted off during New York trading. EURUSD traded narrowly and hovers near 1.2060. Resistance is still seen at 1.21 after its failed attempt to recover that handle today. Subsequent ceilings are to emerge at 1.2140, backed by 1.2180 and 1.22. Support starts at 1.2030, followed by 1.20 and 1.1970. Further losses will be tempered around 1.1940 and 1.19. With no data due out from the Eurozone on Wednesday, the focus will shift to the ECB monetary policy announcement and the subsequent press conference from ECB President Jean-Claude Trichet.

JPY Drifts Sideways

Japan FinMin Tanigaki reiterated the government’s stance of carefully monitoring foreign exchange movements. He also repeated the mantra that forex should accurately reflect fundamentals. Tanigaki will be meeting with US Treasury Secretary John Snow in Washington DC, but is uncertain whether foreign exchange will be a topic of discussion.

USDJPY supports starts at 114, followed by 113.75 and 113. Further losses will target 112.70 and 112.20. Resistance is seen at 114.70, backed by 115 and 115.50. Further gains will target 116 and 116.45.

EURJPY consolidated, but gains were limited near the 138.40-level. The pair hovers near 138-mark with support beginning at 137.60, backed by 137.20 and 136.75. Subsequent floors will emerge at 136.40 and 136. Meanwhile, upside will face resistance at 138.40, backed by 138.70 and 139. Subsequent resistance is seen at 139.50 and 140.

5:00 am GER Jan ZEW Current Situation (exp -38.5, prev -44.4) 5:00 am Jan ZEW Economic Sentiment (exp 64.7, prev 61.6)

FX markets focus on this morning’s release of Germany’s January ZEW survey expected to show its best reading in 2 years, thereby possibly continuing the euro’s gains towards the $1.21 level. Recall the December reading of the Economic Situation had jumped to 61.6 from 38.7, prompting sharp advances in the euro in the second week of December. Even if the figure came within expectations at 65, it would likely be sufficient in signaling that the recovery story in Germany is further transitioning into the recovery phase.

On the Fed front, Federal Reserve Bank of Atlanta President Jack Guynn said on Monday said the Fed’s monetary policy is becoming less clear and more tied to the economy and “the closer we get, the less explicit we can be" on the policy outlook. Meanwhile, Kansas City Fed President Thomas Hoenig affirmed the central banks autopilot stance, conveying that Fed "depends on the data and how the economy emerges going forward." Hoening added Mr. Hoenig noted that the current fed funds rate level of 4.25% is at the "the lower end...of what most economists refer to as the neutral range".



Euro awaits ZEW

EURUSD awaits this morning’s ZEW survey with anticipation as traders judge whether the latest signs of recovery in the Eurozone’s largest economy are further taking hold. A figure of more than 65 in the Economic Sentiment survey should fortify expectations of ECB tightening in Q1 and prop the euro back past the $1.2120s. Subsequent upside follows at 1.2145, followed by $1.2170. Major resistance remains at $1.220, which is the 200 day MA and the 61.8% retracement of the $1.2587-$1.1639. Support stands at the 100-day MA of $1.20. Any disappointment in the ZEW could extend selling momentum towards $1.1980.

Yen consolidates as markets cautious with MoF

Even though the yen gained in early Monday trade following remarks from MoF’s Tanigaki that he was unconcerned with the yens rise, markets are well aware that the MoF’s tune could soon change if the currency starts to appreciate at a faster rate than desired. Rather than focusing on a particular rate, the MoF is primarily worried with the amount of gains the currency takes over a period of time. Thus, the authorities will surely begin their warnings in case the currency continues to gain 3-5 yen per week.

Comments from China seeking to stabilize the effect of Friday’s remarks that Beijing may need to diversify the placement of its foreign assets helped weigh on the Japanese currency. Workers’ earnings were stagnant in the year ending in November but that had little effect on the pair. Upside remains capped at capped at 114.60, followed by 115.20. Downside support stands at 114, followed by 113.80 with key foundation at 113.54 support—the 61.8% retracement of the 108.74-121.36 rally.

The prevailing theme for the day in the currency market was the strength of the yen, which traders bid to its highest level since October 2005 against both the dollar and the sterling. The sharp advance in the Japanese currency triggered a renewed bout of government jawboning. Japan’s Finance Minister Tanigaki, speaking in New York, reiterated the mantra that currencies should reflect economic fundamentals and fluctuate in a stable manner. Furthermore, in hopes of curtailing further appreciation, he added that government authorities would intervene if deemed necessary.

With exception to the yen, the dollar found reprieve against the majors on Monday, recovering slightly from last week’s steep sell-off. The session was quiet by way of US economic data, with just the release of November consumer credit. There was an unexpected drop of $648.8 mln, adding onto October’s record drop of $8.4 bln. Consensus forecast was calling for a rise of $4.5bln. The Fed noted that it was the first time in 13-yrs consumer credit had posted two consecutive monthly declines.

US equities performed well today as the Dow Jones breached the key 11,000-level for the first time since 2001, closing up 52-pts to 11,011.90, marking its fifth consecutive session of gains. The NASDAQ also closed higher, up 13-pts at 2318.69.

Fed speeches scrutinized for direction

Given market perception that the Fed may be nearing the end of its tightening cycle, speeches from Fed officials are scrutinized for clues as to when the central bank will rein in its hand. Today’s speakers included Kansas City Fed President Hoenig and Atlanta Fed chief Guynn, both of which echoed a similar message that the current Fed funds rate was near neutral. However, they both acknowledged the potential risk of inflationary pressures to the economy. Hoenig expects the economy to perform well in 2006, but foresees a slowdown in job growth since the economy is moving toward potential output. He also sees core inflation remaining low and stable in the coming year.

JPY Posts Broad-based Advance

The Japanese yen was the biggest mover in the currency market at the start of the week, rallying sharply against the dollar, euro and sterling. Government jawboning was to no avail as traders continued to the bid the currency higher.

USDJPY has recovered slightly off its multi-month low at 113.75 and now trades around 114.50. Support starts at 114, followed by 113.75 and 113. Further losses will target 112.70 and 112.20. Resistance is seen at 114.70, backed by 115 and 115.50. Further gains will target 116 and 116.45.

The daily chart of the Euro/Yen cross increasingly resembles a head and shoulders reversal formation, with the pair dropping toward the neckline level today at 137.65. The pair has since regained some traction and hovers near 138.40. Initial resistance starts at 138.70, followed by 139 and 139.50. Additional gains will target 140 and 140.60. Support starts at 138, followed by 137.65 and 137.20.

Euro relinquishes gains, eyes of ZEW

The euro fell back beneath the 1.21-level against the dollar, drifting to a session low near 1.2060. Traders will look ahead to Tuesday’s Germany ZEW sentiment survey, which is forecasted to improve from the previous month. The current situation component is seen improving to -38.5 in January, up from -44.4 from December. The economic sentiment is forecasted to jump to 64.0, compared with 61.6 from last month.

EURUSD is steady near 1.2080, with interim resistance starting at 1.21, backed by 1.2140 and 1.2180. Support starts at 1.2050, backed by 1.20 and 1.1930.

4:00 am E-12 Dec Retail PMI (exp 51.5, prev 50.7) 12:40 pm Atlanta Fed's Guynn Speaks. 1:00 pm Kansas City Fed's Hoenig Speaks. 7:30 pm AUD Nov Trade Balance (exp AUD -1.8 ln, prev AUD -1.3 bln)

It was only the first trading week of the year and the dollar lost over 2.5% alone against the yen and the euro amid a combination of escalating market perception that the Fed interest rate hike policy could be concluded by month end and last week’s disappointing US jobs report aiding to confirm these perceptions. The technical picture of the dollar also looks bleak (see latest Articles&Ideas; on www.forexnews.com) as the dollar index broke 3 key measures; the 50% retracement of the 86.04-92.73 move; breach below the 100-day MA; and the 22-month trend line support. The 200 day MA now follows at 87.70.

The question whether the dollar selling is merely technical has been raised. We feel the sell-off reflects more than technical unwinding of accumulated dollar longs and extends to a fundamental change in the currency’s interest rate and growth foundation. In otherwords, the dollar’s cyclical superiority could become increasingly challenged when the unwinding in the interest rate story is complemented by a cooling in US growth. We go one step further to predict a Fed rate cut in Q4.

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.

The dollar foundation could be further damaged by Thursday’s release of the November trade deficit, which we expect to have eased to $67 billion from $68.9 bln. Tuesday’s release of the January ZEW survey from Germany is expected to show broad improvements, thereby potentially adding to the euro’s gains. Neither of the Bank of England nor the European Central bank are expected to change interest rates on Thursday, paving the way for Friday’s release of the US report on December retail sales, which is expected to show broad strengthening, even without the increase in auto sales.

Yen hit 3-month highs amid Tanigaki’s comfort

The yen dragged the dollar below the 114 level for the first time in 3 months after MoF chief Tanigaki said recent yen moves were ``largely in line with fundamentals'', a remark that used to drive down the currency when the Fed was in the midst of its tightening cycle. As the tables reverse, it remains to be seen to what extent does the Japanese government allow its currency to appreciate in a stable manner.

Hitting its 200-week average for the first time in 2 ½ months, the pair is nearing the 113.54 support—the 61.8% retracement of the 108.74-121.36 rally. A breach below 113 calls up the next major figure at 112, which is the 200 day MA. Upside seen capped at 114.60, followed by 115.20. 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.

EURUSD adrift at $1.21

EURUSD loses modest ground off Friday’s 3-month highs of 1.2180, testing the 50% retracement of the $1.26-1.1639 drop at $1.2120. The widening in Germany’s trade surplus is having little impact. Tomorrow’s ZEW survey, however, could reenergize the euro back to the $1.2190s as the recovery story in Germany further transitions into the recovery phase. Key upside stands at $1.2170, followed by the major $1.220 reistsance, which is the 200 day MA and the 61.8% retracement of the said move. Support starts at $1.2060, followed by 1.2010.

CAD serves as the greenback exception

The Canadian dollar shows a familiar pattern of shrugging the major currencies’ performance against the greenback as it enters its third daily decline, losing more than 2.5 cents. Thursday’s disappointing IVEY business survey plunging to 48.3 in December from November's 65.8, breaching expectations of a 62.7 figure was the worst showing since July 2003.

Friday’s Canadian job report showed an unexpected drop of 2,100 jobs in December with the unemployment rate up to 6.5%. Manufacturing jobs continued to lose, tallying the annual losses to more than 100K, but this did not stop finance and high tech jobs from offsetting the overall labor situation. It is also unlikely that the December job report would dissuade the Bank of Canada from raising its cash rate to the expected 3.75% by quarter end from its current 3.25%. But a rising CAD and potential slowing in the US economy could prevent the BoC from delivering the second expected tightening and stop at 3.50% in Q1.

USDCAD upside seen capped at 1.17—the 50% retracement of the 1.1970-1.1424 decline. Bids seen tapering off at 1.1730. Support starts at 1.1633, followed by 1.1580. Key foundation stands at 1.1520.

Speculators react to surging dollar bearishness

The beginning of year turnaround in the dollar appeared to be more than just a technical blip as speculators sharply cut their dollar longs against the yen, sterling and swiss franc, while driving up dollar shorts against the euro, the Canadian and Aussie.
Euro bullishness escalated in its fourth straight week, rising 145% to 11,231 contracts and posting the highest bullish positioning in 4 months. It was also the longest streak of rising bullishness since July 2004. The combination of persisted increases in net longs and the sharp advances carry the making of a key improvement in the currency’s sentiment amid speculators and eventually commercial interests.

Yen bearishness edged higher last week, up 12% to 24,737 contracts following 2 consecutive weekly declines, one of which was a tumble to the lowest net short balance since May of last year. But considering the yen’s continued gains vs the dollar (nearly 2 yen in Friday only), we expect net shorts to drop to the mid teens.

Cable net shorts rose 30% to 15,021 contracts despite the ensuing 3-week highs in cable. Sterling’s losses against the euro are helping to moderate overall sterling bullishness especially amid lingering doubts over the Bank of England’s next policy move. The Bank is expected to stand pat at this week’s monetary policy meeting but rates are expected to drop to 4.25% this quarter.

Swiss net shorts fell 57% to 16,511 contracts, with the prior week’s increase in bearishness interrupted what would have been 4 consecutive weekly declines in nest shorts—a pattern not seen since last August. We could see speculators becoming net long in the swissy as the pair drags the dollar towards the 200-day moving average for the first time since May of last year.

CAD bullishness edged up 13% to 36,687 contracts after 2 straight weekly declines. With USDCAD 2 cents away from its 14-year lows, months, we could see net bullishness revisit its recent high of 56,183 contracts attained last month.

AUD net longs exploded by 687% last week to 7,110 contracts, the highest percentage increase since September 2004. With the pair nearing its 200 day MA for the first time in 4 months, we could see further escalation in net longs, especially as optimism in commodities remains unchecked.

No Key Data

The dollar suffered sharp losses in the first trading week of 2006, partly as a result of a shift in the market’s perception of future global interest rate differentials. Key economic reports proved to be detrimental for the currency, with the catalyst of the sell-off attributable to the language used in the minutes of the FOMC’s December meeting, which signaled a likely slowdown in the Fed’s tightening cycle. It is important to note however, that the possibility of further rate hikes will be contingent on the forthcoming economic data.

Friday’s worst than expected payrolls figure provided traders impetus to sell dollars on the notion that the softening labor market will rein in the Fed’s hand. Key US economic data to be closely watched in the coming week include November’s international trade deficit, due out on Thursday and inflation data in the form of December PPI, as well as December retail sales, slated for release on Friday. The US trade deficit is forecasted to shrink to 66.0 bln, improving from October’s record high deficit of 68.9 bln.

Euro hovers near highs

The key economic highlights from the Eurozone this week include Germany’s ZEW sentiment survey and the European Central Bank’s monetary policy meeting on Thursday. The ECB is expected to leave rates unchanged this week at 2.25%. EURUSD will face interim resistance at 1.2170 and 1.22. Additional resistance is eyed at 1.2240, followed by 1.2280. Support starts at 1.21, followed by 1.2050 and 1.20.

Cable buoyed ahead of data

Sterling continues to trade just beneath the 1.77-level at the start of the week. Traders will look ahead to UK manufacturing and industrial production, as well as the Bank of England’s monetary policy announcement. The BoE is also expected to leave interest rates unchanged.

Resistance begins at 1.77, followed by 1.7720 and 1.7780. Support is seen at1.7650, backed by 1.76 and 1.7530.

Yen creeps higher

The yen maintains its firm tone against the dollar, euro and sterling, which will also likely result in amplified jawboning efforts from Japanese authorities. The breach of the 115.50 level in dollar/yen sent the pair probing levels not seen since October 2005. Support starts at 114, followed by 113.60 and 113. Further losses will target 112.70 and 112.20. Resistance is seen at 114.60, backed by 115 and 115.50. Further gains will target 116 and 116.45.

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.