The major currency pairs remained confined to narrow trading ranges on Monday ahead of key economic reports due out this week. Tuesday’s US reports consist of the Q4 current account balance and retail sales. The current account deficit is forecasted to increase to $218.0 bln, up from the previous quarter at $195.8 bln. Meanwhile, retail sales are expected to reverse last month’s 2.3% rise, instead dropping 0.8% in February. The excluding-autos figure however, is forecasted to improve to 0.5%, versus a flat reading in the previous month.

USDJPY Trades Sideways

Dollar/yen held steady near the 119-level overnight amid softer than expected Japanese economic data. The final revision for Japan’s Q4 GDP was slightly weaker than the preliminary reading, at 1.3% versus 1.4%. The final reading though, was better than forecasts of 1.2%. The year-on-year growth figure was slightly lower than preliminary as well, at 5.4% compared to 5.5%. The current account surplus for January was down by 7.6% to 719.1 billion yen, yet the decline was less than the estimated drop to 670 billion yen. Data also revealed a trade deficit in January at 209.4 billion yen, versus a surplus of 332.3 billion yen from a year earlier.

Traders have more economic data from Japan to digest on Tuesday including January industrial production, January capacity utilization, February bankruptcies, and the BoJ monetary policy meeting minutes. Industrial production is seen holding steady from December on both a monthly and annualized basis at 0.3% and 2.1%, respectively. Meanwhile, the minutes of the BoJ’s latest monetary policy meeting, in which the Bank announced a shift from its quantitative easing stance.

USDJPY hovers near the 119-level, with resistance eyed at 119.40, followed by 120 and 120.30. Additional ceilings are seen at 120.80, followed by 121.40 and 121.70. Support begins at 118.70, followed by 118.30 and 118. Subsequent floors are eyed at 117.50, backed by 117.10 and 116.75.

Euro edges higher

Despite tight trading ranges, the euro managed to eke out gains versus the dollar, climbing to 1.1968. The key highlight from the Eurozone will be Germany’s March ZEW economic sentiment survey, forecasted to improve to 71.0, from 69.8 in February. Due out later in the week is the Eurozone CPI data, which will be watched closely given its likely impact on ECB monetary policy.

EURUSD faces interim resistance 1.20, backed by 1.2050 and 1.21. A move higher will target 1.2140, followed by 1.2180 and 1.2230. Support begins at 1.1930, followed by 1.19 and 1.1870. Additional floors will emerge at 1.1820, backed by 1.18 and 1.1760.

The dollar maintains its buoyant tone against the majors following Friday’s upbeat US labor report. Economic data will be closely watched this week, with inflation data due out from the US, Canada, and the Eurozone. A key driver in the currency markets continues to be sentiment over the direction and timing of central bank moves. Any sign of higher than expected CPI data this week could potentially alter sentiment and reward the respective currency.

JPY Steadies, Eyes Data

A barrage of Japanese economic data is slated for release today, including Q4 GDP, January current account balance, January trade balance, and February consumer confidence. The final reading for Japan’s Q4 GDP is forecasted to slip to 1.2%, versus the previous reading of 1.4%. The annualized growth figure is seen declining to 5.0%, down from 5.5% previously. The January unadjusted current account balance is seen falling sharply to 658.6 billion yen, compared with 1,748.4 billion yen. The adjusted current account surplus is also forecasted to fall to 1,581.1 billion yen in January, compared with 2.024.6 billion yen in December. The trade surplus in January is expected at 140.6 billion yen, significantly lower from a month earlier at 1,059.9 billion yen.

Markets will digest several key Japanese economic reports this week, particularly the Bank of Japan’s monetary policy meeting minutes. The BoJ announced last week the shift from its quantitative easing stance for the first time in 5-years. Traders will closely scrutinize the minutes for clues as to when Japan may begin to raise interest rates. However, BoJ Governor Fukui, speaking at the BIS meeting of central bankers, said that it was premature to discuss higher interest rates.

USDJPY hovers near the 119-level, with resistance eyed at 119.40, followed by 120 and 120.30. Additional ceilings are seen at 120.80, followed by 121.40 and 121.70. Support begins at 118.70, followed by 118.30 and 118. Subsequent floors are eyed at 117.50, backed by 117.10 and 116.75.

Euro Range Narrows

The euro has continued to consolidate versus the dollar, holding closely to the 1.19-level. The coming week will see several key economic reports from the Eurozone, including Germany February PPI, Germany March ZEW sentiment survey, Eurozone industrial production and Eurozone February CPI. Germany’s ZEW economic sentiment is forecasted to improve to 71.0, from 69.8. The focus however, will be on Eurozone February CPI, which is forecasted to reverse the previous 0.4% decline rising 0.3% on the month. Meanwhile, the annual figure is seen slightly lower than a year earlier at 2.3%, down from 2.4% and the core CPI figure is expected to edge up to 1.3%, from 1.2%.

EURUSD encounters resistance at 1.1950, followed by 1.20 and 1.2060. Additional resistance is seen at 1.21, followed by 1.2160 and 1.22. Support starts at 1.1860, backed by 1.1825 and 1.18. A move lower will target 1.1780 and 1.1720.

US non-farm payrolls grew by 243K in February from a revised increase of 170K in January, while the unemployment rate edged up to 4.8% from revised 4.7%. Average hourly earnings grew 0.3% from 0.4%. The revisions for the January and February payrolls totaled an increase of 12K.

The rebound in jobs emerged from the 198K increase in services (94K more than in January), 39K increase in professional business services (22K more than in January) and the 38K in government jobs (67K more than in January). The recovery in those sectors played a major role in more than offsetting the loss of manufacturing jobs and the retreat in construction hiring, which emerged after the disruptive snow storms of February.

Average hourly earnings rose 5 cents in February to $16.47, registering a 0.3% increase from January’s 0.4% monthly increase. The year-to-year growth rose to 3.5%, the highest since September 2001, surpassing the previous February 2003 high when oil prices soared amid mounting uncertainty ahead of the Gulf War II. Interestingly, the real rate of average hourly earnings –adjusted for inflation—stands at -0.4%, when using last year’s monthly average of CPI y/y at 3.4%, suggesting that hourly incomes are failing to keep up with inflation. This has occurred despite the fact that average hourly earnings have increased alongside the fed funds rate since summer 2004, but not sufficiently to stem the pace of rising prices.

Record trade deficit to revisit next week

Thursday's release of the US trade deficit showed a 5% rise to a record $68.5 billion in January from a revised $65.1 billion (initial $65.7 billion) in December. Imports rose 3.5% to $182.9 bln -- while exports rose 2.5% to $114.4 billion.

The 4% rise in the average unit price of crude followed a 5% and 7% decline in December and November respectively. Petroleum imports rose 4.3% to $24.6 bln, or 13% of total imports, close to our prediction made last month when we noted that “the 13% increase in crude prices in January (as measured by the West Texas Intermediate), followed by the 5% increase in December will probably lead to a rebound in oil imports back to the $25 billion mark”. Imports of crude oil edged up 1.4% to $15.7 mln. But the 13% rise in oil prices in January is the largest percentage monthly increase since August.

Looking forward, the February trade deficit could breach the $70 bln mark if it grows by its average monthly growth of 1.4% since January 2003, which is likely to remove as much as 0.4% from GDP growth

As opposed to December bilateral trade gap, which stabilized with the US’ major trading partners with the exception of Canada, the January trade gap deteriorated with all major trading partners with the exception of the UK and Japan, which fell 42% and 5% respectively. The trade gap rose 10%, 11%, and 9% with China, Canada and Mexico to $17.9 bln, $8.9 bln and $4.6 bln respectively. The trade gap with OPEC rose 12% to $8.5 bln.

The US bilateral deficit improved with major trading partners in the month ending in December with the exception of Canada, where the deficit rose 5% to $8 bln. The trade gap fell 12%, 7%, and 2% with China, Japan and the Eurozone to $16.3 bln, $6.8 bln and $7.5 bln respectively. The picture looks less bright a 12-month basis as the trade deficit fell with all the major trading partners, with the exception of the UK.

Although the record trade deficit was lost in teh shuffle of today's jobs release, the external imbalance story could make a comeback next week, when the January report from theTreasury on foreign capital flows (TICS) will shed more light on whether the US continued to rely on hedge funds for the capital accopunt part of its balance of payments. The December trade deficit was unable to be "covered" by hedge flows--even by trade funds. The January version should draw sufficient interest

Today’s jobs report pushed the dollar to 1-week high against the euro, 4-week high against the yen and 8-week high against the pound sterling. Besides a 100% probability of a 25 bp rate hike on March 28, there is more than 50% chance of a similar move in the May meeting to 5.00%. These evolving market expectations are undoubtedly dollar positive, especially if the Bank of Japan takes its time to implement its decision to tighten policy.

But a little digging enables us to see a strong performance by the euro against the pound and the yen this week. EURGBP closed the week at its highest level since January 6, while EURJPY closed at its highest since February 10. Hawkish remarks by ECB’s Nickolas Garganas indicating that the central bank deems inflation risks to be on the rise does increases chances for at least 2 rate hikes by mid summer.

Recall that the ECB has just raised its inflation projections to a 1.9%-2.5% range in 2006, noting last week that ”Risks to the outlook for price developments remain on the upside and include further increases in oil prices, a stronger pass-through of oil price rises into consumer prices than currently anticipated”.

This sends a clear message to the markets. Despite the fact that Fed tightening may have two more lives left in it, there is a resurrection of the tightening story in the Eurozone, Canada and Japan, which prevents the dollar from waging the same aggressive rallies seen last year. This is already proven in the euro’s recurring rallies at low end, as well as the loss of no more than half a cent after a stronger than expected US jobs report.

We stick with our expectations of a $1.1775-1.2200 EURUSD range till end of April, after which the markets have obtained greater clarity on the standing of the Bank of Japan policy shift and the repercussions of carry trade unwinding.

7:00 am CAN Feb Change in Employment (exp 25.0K, prev 26.3K) 7:00 am CAN Feb Unemployment Rate (exp 6.6%, prev 6.6%) 8:30 am US Feb Change in Nonfarm Payrolls (exp 180K, prev 193K) 8:30 am US Feb Unemployment Rate (exp 4.8%, prev 4.7%) 8:30 am Feb Average Hourly Earnings Change (exp 0.3%, prev 0.4%)

Although we see the February payrolls producing a rise of 180K vs consensus estimates of 200K, there is the possibility of a downside surprise to as low as 95K-100K due to the snow storms in the short month of February. This follows unseasonally warm weather in December and January, both months which produced in construction and manufacturing. The unemployment rate is expected to have edged up to 4.8%. If average hourly earnings do slow to 0.3%, then we could see a neutral to negative dollar reaction, especially if the payrolls show no more than 200K. It’s worth noting that the non-farm payrolls have not shown an exceedingly surprising figure in 3 months as was typical of the prior releases.

Yen regains composure

Dollar/Yen had a brief moment in the sun around the 118.50s on speculation that the Bank of Japan will take months before beginning to withdraw excess reserves and on disappointing machinery and household spending figures showing bigger than expected declines of 6.2% and 1.9% m/m in January. But the dollar backed off towards the 118.20s, proving that the 118.50 barrier is a considerable resistance to breach—as seen in the chart below.

The announcement of policy change at the BoJ means that the eventual implementation of the liquidity withdrawal should herald periodic yen rallies amid reoccurring speculation of a stepping up in the tightening by the Bank.

The weekly USDJPY chart shows the 4-month trend line resistance at 118.50, which should trigger downside towards 118.28—the 38% retracement of the 121.31-113.37 decline. Expect further selling to extend to 118 and test 117.70s before possibly settling at the figure.



CAD awaits its own payrolls, USDCAD readies for fresh pullback

We see the expected 20-25K rise in February Canadian payrolls along with an unchanged unemployment rate of 6.6%, could reaffirm the need for the Bank of Canada to further tighten policy. The Canadian jobs story is primarily bright in the private vs the manufacturing sector.

But the chart is showing increased signs of resistance following a rare 5-day rally. The 100 day MA has already acted as resistance at 1.1626, which is seen triggering 1.1560 target. Support seen stabilizing at 1.1540.

A record US trade deficit in January failed to deter the dollar from edging up higher against the majors, with the Bank of Japan’s monetary policy announcement overshadowing other economic events for the day. The January trade deficit in the US was larger than forecast, hitting a record level at $68.5 bln, up from $65.7 bln from December. The trade gap expanded with exports totaling $114.4 bln, while imports burgeoned to $182.9 billion. Weekly jobless claims was larger than forecast, with economists expecting a decline to 290,000, instead climbing to 303,000.

The key highlight for the week will be the February US payrolls report, due out at 8:30 AM EST on Friday. Economists are forecasting non-farm payrolls to decline to 180k in February versus 193k previously. The unemployment rate is seen creeping up to 4.8% after last month’s unexpected decline to 4.7%, which sent the dollar sharply higher. The Fed is expected to closely analyze tomorrow’s data to further gauge the strength of the US economy, with the results also seen factoring into the rate hike debate.

BoJ Announces Shift

While the Bank of Japan announced a shift away from its quantitative easing stance, it still remains months before any significant impact will be seen. The 7-1 BoJ vote to end its quantitative easing policy was an exercise of the Bank’s independence and a means to acknowledge recent improvements in Japan’s economic data. However, a closer inspection of the decision will simply reveal greater transparency rather than monetary policy tightening. The move is likely to appease government opposition to a shift in stance, and slowly paves the way toward additional subtle changes without significantly disturbing Japan’s nascent economic recovery.

USDJPY was supported near 117.10 in Europe prior to shooting up to 118.40 in the New York session. The pair faces interim support at 118, followed by 117.80 and 117.20. Further selling will target 116.80 and 116.50. A breach of the descending trendline resistance, which lies near 118.40-50 relieves immediate downward pressure and will pave the way for further gains again. Resistance will then emerge at 119, followed by 119.40 and 120. Subsequent ceilings are seen at 120.40 and 121.

BoE Unchanged, UK Data Improves

The Bank of England, as expected left monetary policy unchanged at 4.50%. As customary when the BoE leaves policy unchanged, there was no policy statement issued. A flurry of UK economic data was released overnight, including January merchandise trade balance, which saw a smaller than expected trade deficit at 5.73bln sterling versus 6.1 bln sterling in December. January manufacturing production was in line with forecasts, up 0.2% down slightly from the previous month at 0.3%. Industrial production exceeded expectations in January, rising to 0.4%, edging out 0.2% from December

Cable consolidated within range in Thursday trading, with interim resistance eyed at 1.7370, backed by 1.74 and 1.7430. Additional gains will target 1.75, followed by 1.7550 and 1.7590. Meanwhile, support is seen emerging at 1.7350, followed by 1.73 and 1.7275. Subsequent floors are seen at 1.7240, backed by 1.72 and 1.7130.

Loonie sell-off continues on softer trade surplus

The Canadian dollar drifted to a near 3-month low versus the greenback in afternoon trading. Canada’s January trade surplus was less than forecast at C$6.3 billion, and down C$1.4 billion from December’s reading, with Canada’s Stats agency citing lower prices for energy exports. The Loonie continues to extend its slide following the BoC rate hike earlier this week, in which the focus was on the softer than expected tone conveyed by the Bank, and possibly signaling the end of its current tightening cycle.

USDCAD breached the 1.16-level, with key resistance eyed at 1.1630, backed by 1.1670 and 1.17. Additional resistance is seen at 1.1740, followed by 1.1780 and 1.18. Support starts at 1.16, followed by 1.1560 and 1.15. Further selling will target 1.1470 and 1.1420.

4:30 am UK Jan Merchandise Trade Balance (exp GBP -5.8 bln, prev GBP -6.1 bln) UK 4:30 am Jan Manufacturing Production (exp 0.2%, prev 0.3%) UK 4:30 am Jan Industrial Production (exp 0.2%, prev 0.2%) 6:00 am GER Jan Industrial Production (exp 3.2%, prev 3.5%) 7:00 am Bank of England Interest Rate Announcement (exp 4.50%, prev 4.50%) 8:30 am US Weekly Jobless Claims (exp 290K, prev 294K) US Jan Merchandise Trade Balance (exp $-66.6 bln, prev exp $-65.7 bln) CAN Jan Jan Merchandise Trade Balance (exp C$ 7.4 bln, prev C$ 7.7 bln) 9:00 am Fed Board Governor Kohn Speaks. 1:00 pm NY Fed President Geithner Speaks.

Yen stabilises after an initial drop across the board despite the Bank of Japan’s decision to end its quantitative easing policy . BoJ Gov Fukui said the BOJ left the amount of liquidity target reserves at 30 trln after facing government opposition against making the shift today. The bank added that it will take a few months to reduce that target. The BoJ will target the unsecured overnight call loan rate, and aim at keeping it neat 0% as it drains the excess reserves made available for lenders.

In a gradual move towards transparency, the BoJ said it is establishing a price stability framework used for guiding market expectations. Although it did not specify any details, the Bank will likely adopt a target for annual core CPI between 0 and 2%, which it will use for gauging the extent of the required shift over time.
Separately, the bank maintained its outlook that the economy “is expected to continue to recover steadily”, but upgraded its assessment on consumption and household investment.

The knee jerk reaction was a sharp ½ a yen drop against the dollar and the euro before stabilizing as traders realized that the policy shift may not occur immediately, and that the time frame required for the removal of excess liquidity is not dissimilar from delaying the shift until the April meeting. Despite the negative yen reaction to the BoJ decision to vote for ending QEP, we see limited upside room, namely 118.28—the 38% retracement of the 121.31-113.37 decline, with more substantial resistance weighing at 118.50—the downward trend line resistance extending from the Feb 3 high. We see support starting at 117.34—the 50% retracement of the said move, coinciding with the 100-day MA.

This morning’s flurry of trade balance data from the UK, US and Canada, with only the former expected to improve to a GBP 5.8 bln deficit in January from GBP 6.1 bln. The US trade imbalance is expected to show modest widening in the January trade deficit to $66.6 bln from $65.7 bln. The 2005 deficit grew 18% to an aggregate $726 billion, or 5.8% of GDP, from 5.3% of GDP in 2004.

The US trade deficit rose 2% to in December to $65.7 billion from a revised $64.7 billion (initial $64.2 billion) in November. Imports rose 1.9% to $177.2 bln -- while exports rose 2.1% to $111.5 billion. Considering the 13% increase in crude prices in January (as measured by the West Texas Intermediate), followed by the 5% increase in December, we could see a rebound in oil imports back to the $25 billion mark. The 18% aggregate increased in oil imports over the 2 months could translate into an increase of at least 2% in overall imports, which is likely to maintain the trade imbalance at least atop the $65 bln figure.




Euro propped on back of yen’s struggle

EURUSD enters its daily gain versus the dollar, the yen and the pound on a combination of spillover from yen sell-of and relative lack of data, with the exception of those hawkish Fed comments. Today’s US trade figures are unlikely to impact the pair unless we see a number outside the -$65-67 bln range. An upside surprise (above $67 bln) could drag on the dollar as it means an external erosion on the Q1 GDP figures. But any euro upside is seen facing resistance at 1.1975-80 amid cautiousness ahead of the Fedspeak and Friday’s labor report, which could alter Fed funds futures’ expectations for an March rate hike in the event of a down surprise. It is worth pointing out that we have not seen swing releases in non farm payrolls over the past 3 releases. Meanwhile, the ECB path to further tightening remains conspicuous for the markets and we see a 75-80% probability of the Bank pursuing it next month.

Breaching above the 100-day MA of 1.1940, EURUSD faces upside at 1.1975—the 50% retracement of the move from the 2005 low to the 2006 high. Downside seen stabilizing at 1.1920, with subsequent support steadying at 1.19.

CAD stabilizes after oil pullback

The loonie shows signs of bottoming after 4 consecutive daily declines, with Wednesday’s move triggered by the sub $60 pb reading after the surprisingly sharp rise US oil stocks. CAD selling also emerged on the heels of the overall retreat in commodity prices, such as gold, which was aided by the pullback in emerging market currencies against the dollar. Worries of a drying up in liquidity could trigger an acceleration of risk averseness and into safer and high yielding treasuries. But we do see the US yield curve reinverting amid strong non farm payrolls. Expect USDCAD retreat to reach 1.1540, before stabilizing at 1.15.