The dollar was slightly higher against the majors in early Wednesday trading, pushing the euro to 1.2715 and creeping past the 118-level versus the yen. Geopolitical concerns returned to the fore, with North Korea announcing its nuclear aspirations. While it remains to be seen whether N. Korea will indeed pursue testing of nuclear weapons, it is clear the yen has already been hit. Uneasiness in the Korean peninsula has dragged the yen lower across the board, ultimately relinquishing the key 150-handle versus the euro.

Kansas City President Hoenig spoke earlier, saying lower gasoline prices could bolster the economy while a rebound in prices could impede growth. Additionally, he said that past policy actions were still working its way through the economy and believes it is possible to maintain low and stable inflation while engineering a soft landing. He also doesn’t feel that the current account deficit is sustainable over the long-term.

Traders will turn their attention to Fed Chairman Bernanke, who is slated to speak at 12:45pm. His comments will be closely scrutinized for potential clues on the direction of future FOMC decisions. Although it is a foregone conclusion the Fed will leave rates unchanged over the remainder of this year, it remains to be seen what the FOMC has in store for next year.

Also due out for Wednesday will be August factory orders, September non-manufacturing ISM and energy data. Factory orders for August are forecasted to post a 0.1% decline, improving from a 0.6% drop previously. Meanwhile, non-manufacturing ISM in September is seen drifting lower to 56.0, down from 57.0 a month earlier.

RBA Unchanged, Aussie Trapped

The Reserve Bank of Australia left monetary policy unchanged at 6.00% and as customary when the RBA stands pat, no statement was issued. Australia’s Treasurer Peter Costello said that price developments were consistent with moderate inflation outlook. He also added that building approvals data was consistent with a more stable housing market.

Australia’s August trade deficit was smaller than expected at A$208 mln, less than forecasts of A$600 mln. Exports were up 1% m/m, while imports also edged up by 1% on a seasonally adjusted basis.

The Aussie was confined to a narrow trading band in the early Wednesday session, hovering within a 10-pip range. Declining commodity prices has continued to weigh on the currency. AUDUSD will encounter resistance at 0.7460, followed by 0.75 and 0.7530. Subsequent ceilings are seen at 0.7565, backed by 0.76 and 0.7650. On the downside, support will emerge at 0.74, backed by 0.7370 and 0.7320. Additional floors are eyed at 0.73, followed by 0.7250 and 0.72.

Euro Drifts Lower

The euro retreated to 1.2715 against the dollar ahead of Eurozone data due out later in the session. Services PMI for September is forecasted to be marginally lower at 57.0 versus 57.1 in August. At 5:00 AM, E-12 retail trade for August is slated for release and expected to edge up 0.7%, versus an increase of 0.6% previously.

The dollar stayed under pressure after US ISM released yesterday fell unexpectedly in September. The euro hovers above 1.27 against the greenback. There is no clear direction for the dollar yet as the Fed’s two-year tightening campaign paused and some in the market even expect a rate cut by year-end. The market will look to US employment report due this Friday for more clues on the extent of economy slow-down.

Most currency pairs trade in a narrow range today ahead of several key events this week, including the ECB policy meeting on Thursday, several Fed officials’ speeches and US payroll report due Friday.

EURUSD will face interim resistance at 1.2760, followed by 1.2780 and 1.28. Additional ceilings will emerge at 1.2830, backed by 1.2850 and 1.2880. Support starts at 1.2730, backed by 1.27, 1.2670 and 1.2650. Subsequent floors are eyed at 1.2630, backed by 1.26.


Oil Price Drop Hit AUD and CAD

The oil price fell below $60 per barrel. Commodity currencies, such as the Australian dollar and the Canadian dollar, were hit in the oil price drop.

It is widely expected that the Reserve Bank of Australia will hold interest rates unchanged at 6% tonight. The market is now focusing on whether they will raise rates in future. Traders are pricing in a 36% possibility for another rate hike by the end of this year, down from above 60% in the previous month.

AUDUSD will face interim resistance at 0.7450, followed by 0.7490 and 0.75. Additional ceilings will emerge at 0.7530, backed by 0.7550 and 0.76. Support starts at 0.7430, backed by 0.74, 0.7350 and 0.7320. Subsequent floors are eyed at 0.73, backed by 0.7270.

USDCAD will face resistance at 1.1215, followed by 1.1250 and 1.1280. Additional ceilings will emerge at 1.13, backed by 1.1350 and 1.14. Support starts at 1.12, backed by 1.1170, 1.1150 and 1.11. Subsequent floors are eyed at 1.1080, backed by 1.1040.

Yen Fell on North Korea Test Plan

The yen slumped against the dollar and the euro this morning after North Korea talked about a nuclear test plan. North Korea’s foreign ministry said it planed to hold the test to bolster the war deterrent. It is just a knee-jerk reaction and the yen trend is not likely to be altered by this.

The yen remains weak against the euro and the pair is currently trading above 150. The euro has risen above the 150-level against the yen many times before with a record high at 150.73. However, the euro may face pressure on a speculation that possible intention may from Japan or European to push down the price.

USDJPY encounters interim resistance at 118, backed by 118.30. Subsequent ceilings will emerge at 118.50, followed by 118.70 and 119. On the downside, support begins at 117.60, followed by 117.30 and 117. Additional floors are eyed at 116.70, backed by 116.50 and 116.30.

The dollar continued to drift lower in early Tokyo trading, extending losses from the Monday session. Weak US economic data dragged the greenback lower, with manufacturing ISM softer than expected at 52.9. The economic calendar remains light for today, with markets looking ahead to key events slated for Wednesday.

Fed Chairman Bernanke is slated to speak the Economic Club in Washington on Wednesday morning. His comments will be closely scrutinized for the FOMC’s outlook on both economic growth and inflation. While the Fed is largely expected to remain unchanged for the rest of the year, it is unclear where interest rates are headed in 2007. The likelihood of a Fed rate cut early next year has gained further support in light of continued softening in US economic fundamentals.

Yen Mixed Despite Hawkish Comments

The yen firmed against the dollar near 117.60 but drifted lower versus the euro beneath the 150-level and sterling around 222. The major currency pairs remain locked in recent ranges as traders wait for a catalyst to prompt a break-out move.

Japanese government officials hinted at the possibility of further tightening based on improving economic fundamentals. In spite of the upbeat comments, the foreign exchange market exhibited a muted reaction. Japan’s Economics Minister Ota said the BoJ would make an appropriate decision on rates based on its Tankan survey. Ota expressed optimism about the economy, saying the Tankan confirms the strength of business sentiment, but remains cautious over the US economy. Additionally, Japan’s Finance Minister Koji Omi said the time was ripe for declaring the end of deflation.

With questions of whether the Bank of Japan will continue to tighten policy returning to the fore, currency traders will likely reassess the profitability of carry trades. Furthermore, given the steep run-up in the yen cross pairs, it will be interesting to see if follow-through buying can materialize to break above its recent trading range.

USDJPY encounters support at 117.60, followed by 117.20 and 117. Subsequent floors are eyed at 116.50, backed by 116 and 115.70. Gains will target resistance at 118, followed by 118.40 and 118.70. Additional ceilings will emerge at 119, backed by 119.30 and 119.65.

EURJPY holds firm around the 150-handle, with support beginning at 149.60, followed by 149.20 and 149. Further selling will target 148.70, backed by 148.30 and 148. Meanwhile, gains will target key resistance at 150.25, followed by 150.60 and 151. Subsequent ceilings are eyed at 151.40, backed by 152 and 152.50.

Euro Edges Higher

The euro remained buoyed above the 1.27-level amid upbeat Eurozone economic data, contrasted against softening US data. In the session ahead, markets will look to August Eurozone unemployment rate, which is seen unchanged at 7.8%. Industrial producer prices are forecasted to slip to 0.2%, down from the previous month at 0.6%.

Later in the week, the focus will turn to the ECB’s monetary policy announcement on Thursday. The Bank is largely forecasted to lift rates by 25-basis points to 3.25%, and by another 25-bp in December. Markets have fully priced in Thursday’s rate hike and will likely garner little reaction in foreign exchange.

EURUSD holds firm at 1.2740, with resistance eyed at 1.2780, followed by 1.28 and 1.2830. Additional ceilings are seen at 1.2865, backed by 1.29 and 1.2930. Support begins at 1.27, followed by 1.2650 and 1.26. Subsequent floors are seen at 1.2570, backed by 1.2540 and 1.25.

The euro rose across the board after a report showed the euro zone manufacturing industry remain robust. The euro zone manufacturing PMI rose from 56.5 in August to 56.6 in September, above the forecast for 56.5.

The European Commission said today in its quarterly report that growth risks in the near-term are slightly tilted to the upside and monetary policy remains accommodative after recent rate hikes.

US ISM index slipped to 52.9 in September from 54.5 in the previous month. The dollar fell to a one-week low at 1.2757 against the euro. The Fed¡¯s two-year tightening campaign seems already end. Traders are pricing in a 9% probability for a rate cut by the Fed before the end of this year.

Several central banks will announce their monetary policy this week. Both Australia central bank and England central bank are likely to keep interest rates unchanged at 6.00% and 4.75% respectively. It is widely expected that the ECB will raise interest rates by 25 basis point to 3.25% on its policy meeting this Thursday.

EURUSD will face interim resistance at 1.2760, followed by 1.2780 and 1.28. Additional ceilings will emerge at 1.2830, backed by 1.2850 and 1.2880. Support starts at 1.2730, backed by 1.27, 1.2670 and 1.2650. Subsequent floors are eyed at 1.2630, backed by 1.26.


Sterling Strengthens on Robust Manufacturing Data

The British pound gains after UK CIPS manufacturing PMI came out at 54.4, beating the forecast for 53.0 and the August reading of 53.1.

GBPUSD encounters interim resistance at 1.8865, backed by 1.89, 1.8920 and 1.8950. Subsequent ceilings will emerge at 1.8980, followed by 1.90 and 1.9030. On the downside, support begins at 1.88, followed by 1.8760 and 1.8740. Additional floors are eyed at 1.87, backed by 1.8670 and 1.8650.


Yen Rebounds against Dollar

The yen rebounds against the dollar after a Japan government report showed that lager manufacturers confidence increased in September. However, the yen remains weak against the euro and sterling as manufacturing data from European came out strong today.

USDJPY encounters interim resistance at 117.80, backed by 118 and 118.30. Subsequent ceilings will emerge at 118.50, followed by 118.70 and 119. On the downside, support begins at 117.60, followed by 117.30 and 117. Additional floors are eyed at 116.70, backed by 116.50 and 116.30.

The foreign exchange market has remained confined within its ranges over recent months with little fresh impetus to break out of its consolidation. The dollar has edged up slightly against the euro to 1.2670 and 118.21 versus the yen amid lackluster trading in the early Asian session. Global economic events in the week ahead may provide fodder for traders eagerly seeking a departure from well-worn FX ranges.

Data from the US has maintained a soft tone, highlighting the slowdown hindering economic activity. In particular, the abating housing market has continued to weigh on the economy. Reports slated for release this week will shed more light on manufacturing and the labor market. Recall the contradictory signals received from the negative Philadelphia Fed manufacturing survey contrasted against the robust Richmond Fed survey. Monday will see September manufacturing ISM, which is forecasted to drift slightly lower to 53.5 versus 54.5 a month earlier. Nevertheless, ISM is expected to expand, holding above the key 50-level. The prices paid component is also seen easing to 68.0, from 73.0.

Traders will also focus on the September jobs report, due out on Friday. Economists are calling for non-farm payrolls to slip to 120k, down from 128k a month earlier. The unemployment rate is seen unchanged at 4.7%, while average hourly earnings are forecasted to edge up to 0.3%, from 0.1%. Furthermore, Fed Chairman Bernanke will be speaking on Wednesday. His comments will be closely scrutinized for the Fed’s outlook on the economy and inflation.

Yen Slips despite Tankan

The BoJ’s Q3 Tankan large manufacturers’ diffusion index was large than expected at +24, exceeding estimates of an unchanged reading from the previous quarter at +21. The diffusion index for large non-manufacturers’ was unchanged at 20. The December outlook for both large manufacturers’ and non-manufacturers’ are seen at +21. Large firms anticipate capital expenditures for 2006/07 at 11.5%, slightly short of forecasts at 11.7%. Large manufacturers’ expect capex at 16.9%, while non-manufacturers’ see capex at 8.5%. The BoJ report said large manufacturers’ expect USD/JPY to average 111.64 in the coming year.

The yen initially strengthened on the upbeat Tankan survey, rising to 149.52 against the euro and 117.88 versus the dollar. However, the reaction was short-lived with the yen relinquishing its earlier gains and drifting lower across the board.

USDJPY holds steady above the 118-level, with interim resistance seen at 118.40, followed by 118.70 and 119. Subsequent ceilings are eyed at 119.30, backed by 119.65 and 120. Support starts at 118, followed by 117.60 and 117.20. Additional floors are eyed at 117, backed by 116.50 and 116.

Euro Soft Ahead of ECB

The ECB is largely anticipated to lift its benchmark lending rate by 25-bp points to 3.25% when it announces its policy decision later in the week. The Bank is also seen tightening by another 25-bp in December, leaving the ECB’s interest rate at 3.50% by year-end. The transparency of ECB officials has tamed foreign exchange movements with traders already fully pricing in two more rate hikes.

The dollar was mixed on Thursday trading, drifting lower versus the euro and climbing higher against the yen, albeit confined within recent ranges. Data from the US continues to confirm the notion of a slowing economy, highlighting the increased likelihood the next Fed move may be toward easing rather than further tightening. Additionally, with the Eurozone and Japanese economies on the rise, the deceleration of US economic growth will place greater pressure on the dollar.

Final second quarter GDP was weaker than forecast at 2.6%, from the previously reported 2.9% growth rate and down sharply from the robust 5.6% posted in the first quarter. The components of the report that stood out particularly were housing investment and the core PCE price index. The slowdown of the housing market continues to accelerate as reflected by Q2 housing investment, which was declined further by 11.1% compared with a previous reported decline of 9.8%. Lastly, the final core PCE index for the second quarter stood firm at 2.7%, down slightly from the preliminary 2.8% showing – but still at its highest level since 2001.

The GDP report underscores the current impasse on Fed monetary policy. Given the recent declines in energy prices, inflationary pressure on the economy is anticipated to further ease. This week’s upbeat consumer confidence report was also a reflection of lower gasoline prices. The FOMC has acknowledged that the weakness in the US economy will alleviate inflationary pressures, and as such has opted to leave rates steady at its previous two policy meetings. However, the question that remains is how long the Fed can maintain its bias against inflation and leave interest rates unchanged before the economic slowdown becomes too much to bear.

Yen Resumes Slide

The yen posted sharp losses against the majors, losing most ground versus the euro near the 150-level. The decline was triggered by comments from Japan’s new Finance Minister Koji Omi, who implicitly issued a rebuttal to calls from Eurozone officials that the sharp weakness in the yen against the euro was unwarranted. Omi said there was no reason to comment or even act on the euro/yen moves at present, but added that currency rates should reflect economic fundamentals. However, his disclaimer to the markets was that he was still an amateur on forex, and that markets should not react to his comments. Regarding monetary policy, Omi said the government should not fret over BoJ policy and that it was undesirable to try to control interest rates.

In the session ahead, traders will look ahead to August core CPI, unemployment rate and industrial output. Core consumer prices are seen edging up slightly to 0.3% in August, up from 0.2% previously. The unemployment rate is seen unchanged at 4.1%, while industrial output is forecasted to rebound sharply to 2.0%, from a 0.9% decline in the previous reading.

Dollar/yen continues to creep higher, with interim resistance eyed at 118, followed by 118.40 and 118.75. Subsequent ceilings will emerge at 119, backed by 119.30 and 119.65. Support begins at 117.50, followed by 117.30 and 117. Additional floors are eyed at 116.60, followed by 116.20 and 116.