US non-farm payrolls grew by 193K in January from a revised increase of 140K in December, while the unemployment rate held dropped to 4.7% from and average hourly earnings grew 0.4% from a revised 0.4% in December. The revisions for the November and December payrolls totaled an 81K increase in payrolls.

The 193K increase in payrolls was closer to our forecast of 200K than the consensus forecasts of 250K. The report lifted the 3-month moving average to the highest level since June 2004, thanks to a recovery construction and steady job creation in services.

Milder weather did help construction and pushed up those jobs by 46K from December’s 5K, while services jobs remained in the 130K range as the 17K increase in education and health employment, coupled with the 9K increase hospitality and leisure helped stabilize the 54K decline in professional and business services.

Manufacturing jobs barely made it back in the black with 7K as metallic and nonmetallic–related product jobs gains were offset by a decline in computer and electronic products.

Average hourly earnings rose 7 cents in January to $16.41, registering a 0.4% increase from December’s 0.4% monthly increase. The year-to-year reading rose 3.2% rise, the highest since the 3.4% increase in February 2003 when oil prices soared amid mounting uncertainty ahead of the Gulf War II. With January year on year inflation estimated at 3.4%, the real growth in average hourly earnings fell 0.2% keeping this rate in negative for 23 months.

Payrolls Justify Unnecessary Hike for Fed

The jobs report boosted the dollar past the key $1.20 figure against the euro and to a fresh 7 week high against the yen past the 119 figure. The main reason for the immediate dollar jump was the 0.2% drop in the unemployment rate to 4.7% as well as the 81K in upward revisions for November and December. There was also an aggregate 151K in upward revision over the Aug-Dec period. The 1.92 million jobs created in 2005 was less than the 2.19 mln of 2004, but almost matched the 1.95 million of the heady 2000.

The dollar also applauded the figures as they pushed the probability of a March rate hike to 90%, hence the deepening inversion of the yield curve, whereby 10-year yields closed at 4.53%, while their 2-year counterpart shot up to 4.57%.

Assessing Fed Chairman Bernanke’s inflation-targeting preferences, and the looming expectations that core inflation could disturb the Fed’s preferred level of 2.0% as long as oil prices continue to build a lasting territory above the $60 mark, markets will have reason to fear that a slowdown could turn into a hard landing.

Those who are skeptical that this year’s yield curve inversion could bring about an economic slowdown, point to 1998, when an inversion failed to cause any slowing. But the real reason there was no slowdown was that the Fed did not raise interest rates, in either of 1998 or 1997. Rather, the drying up in capital market liquidity was behind the drop in 10-year yields. But the inversion-recession periods of 1980-82, 1990 and 2000-01 have each involved notable monetary policy tightening by the Fed.

The stock market could also contribute to an economic cooling, especially as the fate of the permanent tax cuts is in uncertainty. Baring the nuclear arms standoff with Iran, the S&P500; has formed a head-&-shoulder formation, which is a classic bearish formation. The index closed at 1264, just 4 points away of the neckline support of 1260. The combination an inverting yield curve, slowing activity, falling equities and hawkish Fed does not promise for a soft landing.

4:00 am E-12 Jan Services PMI (exp 57.0, prev 56.8) 5:00 am E-12 Jan CPI y/y (exp 2.4%, prev 2.2%) 8:30 am US Jan Average Hourly Earnings (exp 0.3%, prev 0.3%) 8:30 am US Jan Unemployment Rate (exp 4.9%, prev 4.9%) 8:30 am US Jan Employment Payrolls (exp 200K, prev 108K) 10:00 am US Jan Services ISM (exp 59.0, prev 61.0) 10:00 am Dec Factory Orders (exp 1.1%, prev 2.5%)

This morning’s payroll report is widely anticipated to show the creation of as many as 250K US jobs last month due to favorable weather boosting construction and robust consumer demand supporting retailers. Our forecast for 200K should be a sufficiently favorable outcome for the dollar—realized—especially as it stands twice as much as the December figure. Both the unemployment rate and average hourly earnings growth are expected to repeat their December rates of 4.9% and 0.3% respectively.

Average hourly earnings growth is being increasingly scrutinized as an indicator of pay inflation if it comes in above 0.4%, especially after registering a 3.3% rise last month on a year to year basis--the highest since February 2003 when oil prices soared amid mounting uncertainty ahead of the Gulf War II.A figure of at least 0.3% could maintain the year to year rate on its 3 year highs and may keep the Fed on inflation watch into the March FOMC meeting. But from a prosperity point of view, the annual growth in average earnings shows to remain below that of annual inflation since last summer, which means that US wage hourly earners are unable to keep up with consumer inflation from growth point of view. This suggests that inflation is higher than the Fed may want it to be with regards to consumers’ purchasing capacity.



From a market reaction stand point, we see the strong 250K forecasted by the consensus could be a bar far too high to meet in order for the dollar to sustain the week’s rally. A figure between 200K and 260K is likely to trigger some knee-jerk buying in the dollar but we could see a return to neutral or “modestly higher” territory in the greenback by the end of the session. The latter rationale is supported by the reasoning that the Fed will not necessarily have to raise rates in March due to the January jobs report. Not only will the Fed require the February report, but a host of essential figures for the month of January and February, as well as the preliminary (revised) GDP figures of Q4. A figure of less 140K-180K should be dollar negative.

The services ISM should only make a difference in favor of the dollar in the event of a figure at or above 60, especially after the Dec figure was downwardly revised to 61.9. Also watch out from the prices paid index, which could hurt bonds AND the dollar should it bounce back above the 71 level because it mean obligating the Fed to tighten further even when growth risks in being tepid.

As the ball creeps into the court of the UN Security Council, markets are still expecting explicit efforts from China and Russia to prevent the Council from drafting a belligerent resolution against Iran, which is helping to relieve event risk. The fact that the US said it is not in a hurry to press for sanctions against Iran is also placing a damper on any risk averse trades such as long CAD, swissy and yen against the dollar.

Euro awaits CPI, US payrolls

Euro resumes its firmness following the hawkish ECB press conference which makes a March rate hike a foregone conclusion. Now the pair awaits January CPI prior the US payrolls, as the former is expected to have bounced back to 2.4% on a year to year basis in flash estimates, an event that could strengthen expectations of an ECB hike in March and provide essential support ahead of US payrolls. As long as traders react on the US payrolls in light of expectations of the March FOMC, we could see renewed euro pressure in the case of a 200-240K figure.

EURUSD faces initial and key resistance at $1.2110—the 50% retracement of the $1.2587-1.1639 decline. Subsequent pressure stands at the 200 day MA of $1.2134. Supports starts at 1.2060, followed by key foundation at $1.2020. A US payroll figure of 260K or more could drag the pair to the 1.20 figure. Key foundation stands at the 100 day MA of $1.1967.

Yen depends low yield stigma, short-term recovery seen today

Little change in the yen’s 7-week lows against the dollar amid increased reentry by participants to exploit the carry trade dynamics at the expense of the Japanese unit, especially as Japanese officials have hinted against any reduction in liquidity before the end of March. The yen’s widening damage is being reflected in the currency’s 5 ½ week lows against the Aussie and the euro.

Though the upside potential sees promising in light of a favorable US jobs report, we see the MACD conditions suggesting a short-term peak in the pair according to a fading in the bullish moving average cross over. We see interim support at 118.30—38% retracement of the 121.36-113.41, followed by 118.00. Upside capped at 118.70.

The dollar was mixed on Thursday, relinquishing previous session’s gains versus the euro and sterling, while climbing to multi-week highs against the yen. In the face of soft economic, the greenback was able to keep its losses in check, confining the euro’s gains to 1.21.

Productivity in Q4 disappointed, marking its first decline in five years. US Q4 productivity decreased by 0.6% compared with a 4.5% increase in the previous quarter. Meanwhile, weekly jobless claims fell by 11,000 to 273,000 and the 4-week moving average was lower by 4,750 to 284,250.

All eyes will be on tomorrow non-farm payrolls number, due out at 8:30 AM. Economists are forecasting non-farm payrolls for January to rise to 200k, up from December at 108k, while the unemployment rate is seen unchanged at 4.9%. An unexpectedly stronger showing in the non-farm payrolls number will likely have the greatest impact on the dollar/yen, which continues to maintain its bid tone.

ECB unchanged, for now

The ECB kept monetary policy unchanged at 2.25% when it announced its rate decision this morning. However, ECB President Trichet delivered a hawkish tone in his press conference – leading many to surmise a March rate hike. Trichet said market expectations for an imminent rate were reasonable given the slate of recent economic data. He added that the central bank would exercise vigilance in ensuring that long-term inflation expectations remain within levels of price stability. ECB interest rate watchers will turn their attention to the Eurozone January inflation report, due out at 5:00 AM EST on Friday. January CPI is forecasted to edge up to 2.4% annually, up from 2.2%.

The euro bounced off its lows on the prospect of ECB monetary tightening, retesting the 1.21-level. The immediate view is for the euro to continue higher against the dollar, with the recent lows seen as a near-term base. Resistance in the pair begins at 1.21, followed by 1.2130 and 1.2165. Subsequent ceilings will emerge at 1.22, backed by 1.2240 and 1.2270. Meanwhile, support will emerge at 1.2030, followed by 1.20 and 1.1970. Additional floors are seen at 1.1940 and 1.19.

Yen slides amid widening yield-differential

The Bank of Japan is likely to maintain its ultra-easing stance, according to BoJ Deputy Governor Muto – saying that conditions were not yet in place to tighten. With yield-differentials widening, the yen fell to a fresh multi-week low against the dollar at 118.65.

USDJPY faces resistance at 119, followed by 119.50 and 120. Additional resistance is eyed at 120.40 and 120.80. Losses will encounter support at 118, followed by 117.40 and 117. Subsequent floors will emerge at 116.60, backed by 116.25 and 116.

7:45 am European Central Bank Rate Announcement (exp 2.50%, prev 2.25%) 8:30 am European Central Bank Press Conference on Economic Outlook & Bank Forecasts. 8:30 am US Weekly Jobless Claims (exp 293K, prev 283K) 8:30 am US Q4 (exp 1.7%, prev 4.7%) 7:30 pm AUD Dec Trade Balance (exp AUD -1.8 bln, prev AUD -2.47 bln) 7:30 pm AUD Dec Retail Sales (exp 0.5%, prev -0.1%)

Euro extends selling despite expected ECB hawkishness

Euro extends selling under the $1.2040s against the dollar, testing 2-week lows on emerging market expectations that the ECB will issue a relatively neutral press conference after today’s interest rate decision on the heels of a modest rise in Eurozone manufacturing, negative German job figures and a “pronounced slowdown” in France’s manufacturing survey.

We stick with our prognosis of a 60% chance of a 25-bo rate hike in the refi rate to 2.50% on the heels of last week’s overwhelmingly hawkish chorus from a host of ECB officials. The 5/12 year high in Germany’s IFO business survey is joined by a pickup in sentiment surveys from Italy and France.

The chart below shows positive relation between turns in the IFO’s current climate index and the ECB’s refi rate. And with the cooling growth conditions in the US and the recovery signs in the Eurozone, this is the time for the ECB to maintain the 200-bps differential between the fed funds and refi rates after Tuesday’s Fed hike.



Recall how the euro fell across the board 3 Thursday’s ago when the ECB chief JC Trichet dropped the hawkish reference of “monitor very closely” describing its stance towards inflation risks, which was used in the previous 2 press conferences. But the euro jumped back more than a cent and a half the following day (Fri 13) when JC Trichet recalled the hawkish phrase and said in an interview that the bank must be “vigilant'' on inflation expectations and there are ``encouraging'' signs that economic growth is accelerating.
We see the upside potential to arise following the 8:30 am (NYT) press conference because even in the case of no rate hike we expect Trichet to communicate vigilance towards inflation rather than omitting this important phrase which could further weaken the euro and exacerbate inflationary conditions. Initial resistance stands at $1.2070, followed by key upside at $1.2110—the 50% retracement of the $1.2587-1.1639 decline. But downside risks appear considerable in the event that traders shrug any ECB hawkishness and focus on Friday’s expectedly strong US payrolls. Supports starts at $1.2020, followed by 1.20. Key foundation stands at the 100 day MA of $1.1967.

Yen hit amid contrasting Fed/BoJ market assessment

Yen hits 7-week lows against the dollar as reemergence of carry trade dynamics at the expense of the Japanese unit are resurrected by contrasting market expectations of the policy outlook at the Federal Reserve and the Bank of Japan. While the Fed clearly left the door open for another 25-bp rate hike in March, the Bank of Japan may not reduce liquidity before end of March as was signaled late last year. Comments from Yosano of doubting the durability of the recent monthly increases in CPI push the lid on any pre-March policy tightening.

BoJ policy board member Muto stuck to the usual defensive stance of stating that current conditions are not yet in place for ending the quantitative easing policy.

Also weighing on the yen is the decision by the IAEA to hold an emergency meeting today in Vienna to decide over whether to report Iran to the UN Security Council. This is helping to underpin gold prices, which extend the yen-gold carry trade. Tensions escalated after Iran threatened to resume suspended research activities in the event it were referred to the UN council. Although permanent Council member nations China and Russia are backing a less expedited process, markets could grow jittery with as a result from any belligerent statements from Tehran, especially if Israel were reintroduced to the diplomatic fray.

The 7-week high of 118.61 breaches the 61.8% retracement of the Dec-Jan, triggering a bullish moving average cross-over whereby the moving average convergence/divergence (MACD) line breached above the signal line drifts, laying out the path for further advances towards 118.70, followed by 119. Support rises to 118.30, backed by 118.00.

The dollar further extended its gains on the major currencies, pushing the euro to a low of 1.2045 and rising to a fresh multi-week high against the yen above the 118-handle. Despite the gains posted by the greenback across the board, it failed to make significant headway against the Canadian dollar, which still hovers near 14-year lows – thus prompting traders to question the underlying trend.

Although it remains to be seen whether the dollar will maintain its strength against the majors, today’s sharp climb versus the euro, sterling and yen reinforce the greenback’s resiliency in light of soft economic data. With manufacturing in the US gradually declining from its Sept 2005 peak, activity has slowed to levels near its European counterparts. US manufacturing ISM still remained above the key 50-level, which distinguishes between expansion and contraction, it slipped to 54.8 in January from 55.6 in December. Manufacturing PMI was also lower in the Eurozone, slipping marginally in January to 53.5. Only the UK’s CIPS improved upon the previous month’s reading, rising to 51.7.



Euro Stumbles, ECB Eyed

The euro declined sharply versus the dollar, with selling accelerating sharply in the New York session. EURUSD has retreated significantly since reaching the 1.23-peak last week, hitting a low of 1.2045. A pair of weaker than expected economic data from the Eurozone may have weighed on the single currency. Unemployment unexpectedly edged higher to 8.4% in December, worst than both forecast (8.2%) and the prior month’s figure (8.3%). Manufacturing PMI also fared worst in January, slipping to 53.5, down marginally from 53.6. However, economists had expected an improvement to 54.0.

The key highlight for Thursday is the European Central Bank’s monetary policy announcement at 7:45 AM. As was previously reported, Forexnews anticipates the ECB to surprise markets with a 25-bp rate hike on the basis that key ECB members have repeatedly indicated that rates were below historical levels, while also communicating the growth merit of a tightening. Another reason is for the need to maintain the yield differential steady at 200-bp.

Look for the euro to recover slightly against the dollar in early Thursday trading, but will likely remained confined as traders await the ECB decision later in the session. Interim resistance starts at 1.2090, followed by 1.2120 and 1.2165. Subsequent caps are seen at 1.22, followed by 1.2240 and 1.2280. Support will emerge at 1.2040, backed by 1.20 and 1.1970 and 1.1935. Additional declines will target 1.19, followed by 1.1850 and 1.18.

Loonie: Leader or Laggard?

As the greenback posted broad-based gains on the majors in Wednesday trading, it is important to point out that the Canadian dollar refused to relinquish its grip near 14-year highs. It remains to be seen whether the Loonie’s resiliency is a signal that the scope for further dollar gains are limited, or whether it is simply lagging the rest of the pack.

USDCAD will face resistance at at 1.1425, followed by 1.1470 and 1.15. Additional resistance is seen at 1.1560 and 1.16. Support begins at 1.1370 – the pair’s 14-yr low, followed by 1.1320 and 1.1270. Next key psychological level is eyed at 1.12.

UK Manufacturing Rises

The UK’s January manufacturing CIPS improved to 51.7, besting both last month’s 51.1 reading and estimates at 51.3. However, the report was not entirely rosy. The export orders component dipped into contractionary territory, down to 48.5 – its lowest since May 2005 and beneath the key 50-level. Furthermore, the employment index contracted further to 46.5, versus a downwardly revised December reading at 46.8.

Cable retreated from above the 1.78-handle to dip to a session low at 1.7724. Support starts at 1.77, followed by 1.7660 and 1.7625. Resistance begins at 1.7780, backed by 1.7820 and 1.7860.

At 4:00 AM Eurozone January Manufacturing PMI (exp 54.0, prev 53.6) At 4:30 AM UK January Manufacturing CIPS (exp 51.3, prev 51.1) At 5:00 AM Eurozone December Unemployment Rate (exp 8.2%, prev 8.3%) At 10:00 AM US January Manufacturing ISM (exp 55.3, prev 55.6) US December Construction Spending (exp 0.2%, prev 0.2%)

Market attention briefly shifts away from global interest rate differentials and turns to the array of economic data slated for release in the remainder of the week. The key highlight for the coming session will be the manufacturing data from the US, Eurozone and UK, with only the US ISM figure forecasted to be worst than the previous month. Although traders may wait until the latter half of the week to initiate any significant currency moves, as a result of the ECB monetary policy decision and the US employment report – it is important to keep a close eye on the US Treasury’s quarterly refunding announcement for Wednesday.

Geopolitical uncertainties may once again cast a shadow over the dollar. In President Bush’s State of the Union speech, he declared that Iran was “held hostage” by Islamic clerical leaders and the “world must not permit” them to obtain nuclear weapons. Markets will keep a tight watch on further developments from the International Atomic & Energy Agency and whether they will involve the UN Security Council in the Iran matter.

Loonie Firms near 14-year High

The Canadian dollar continues to maintain its bid tone against the greenback, unyielding from its highest levels since 1991 beneath the closely guarded 1.14-level. The Loonie has been riding high on the coattails of the relentless run-up in spot gold, which had a stellar climb to 25-yr highs yesterday as well. Furthermore, with the Bank of Canada, thus far, keeping pace with the FOMC’s tightening cycle – the differential remains at 100-bp and will likely continue to provide support for the Canadian dollar. The next key economic event from Canada will be next Friday’s employment report (Feb 10), with the unemployment rate forecasted to remain near 30-yr lows.

While USDCAD may be susceptible to partially retrace its recent move lower, the vulnerable side in the pair remains on the downside. Ceilings will begin at 1.1425, followed by 1.1470 and 1.15. Additional resistance is seen at 1.1560 and 1.16. Support begins at 1.1370 – the pair’s 14-yr low, followed by 1.1320 and 1.1270. Next key psychological level is eyed at 1.12.

Euro Edges up Ahead of PMI and Jobs

Traders will turn their attention to Eurozone economic data scheduled for release later in the session. January manufacturing PMI is seen improving to 54.0, a boost from December at 53.6. The unemployment rate for December is forecasted to decline slightly to 8.2%, versus 8.3% in the previous month. The ECB’s rate decision on Thursday remains the key highlight from the Eurozone. In the event of a surprise rate-hike this week, traders can look for a retest of last week’s 1.23-peak.

The euro hovers in a narrow range versus the dollar around 1.2155. Resistance starts at 1.2190, followed by 1.2230 and 1.2280. Last week’s peak of 1.23 is seen as the next key level of resistance. Support starts at 1.2140, the session low, backed by 1.21 and 1. 2060. Additional floors are seen emerging at 1.20 and 1.1970.

Sterling Sustains Gains

Cable maintained the majority of its previous session’s gains to hold above the 1.78-handle. The UK manufacturing CIPS report is forecasted to nudge up slightly to 51.3 in January, compared with 51.1 in the previous month.

Further gains by the Pound sterling will target 1.7850, followed by 1.79 and last Wednesday’s high at 1.7930. Support begins at 1.7770, followed by 1.7730 and 1.77.