No Key Data

The currency market will further assess the state of the US economy and the outlook for global interest rate differentials given the slate of economic events due out in the week ahead. The major currency pairs have consolidated slightly in early Monday trading, with the dollar mired on weak footing. Sentiment for upcoming FOMC policy decisions has moved further into the camp for rate easing, rather than tightening – specifically following Friday’s manufacturing ISM, which revealed contraction for the first time in over 3-yrs. Historically, the Fed has never raised interest rates while manufacturing ISM was beneath the key 50-level. Additionally, it may indicate a greater likelihood for a change in the Fed’s stance – which we currently anticipate for Q1 2007.

The combination of deteriorating economic fundamentals and probable monetary easing has pushed the dollar off the cliff into freefall over the past week. Any respite witnessed at the start of the week will likely prove short-lived, with the ECB widely anticipated to further rein in monetary policy with a 25-bp rate hike to 3.50% and the potential for Bank President Trichet to signal the need for additional rate hikes in 2007. The primary focus will be Friday’s highly scrutinized November jobs report. Dollar bears will try to extract additional evidence that the US economy is headed toward a hard landing with worsening conditions in the labor market. Consensus forecast for November non-farm payrolls is for an increase to 113k, up from 92k. Meanwhile, the unemployment rate is expected to creep back up to 4.5% following October’s unexpected decline to 4.4%.

Euro Remains Firm Around 1.33

The euro relinquished gains after touching a fresh 20-month high at 1.3367 at the start the Monday session. With the markets largely anticipating the ECB to lift rates to 3.50% this Thursday, the key focus will be on the subsequent press conference for Bank President Trichet. Given the ECB’s track record for maintaining transparency, Trichet will likely provide clues as to whether markets can expect further policy tightening in 2007.

Data released from the Eurozone saw October PPI, which was slightly lower than economists’ estimates. The October PPI came in at 0.0% m/m, while the annual reading stood at 4.0%.

Interim resistance is seen at 1.3340, followed by 1.3370 and 1.34. Additional ceilings will emerge at 1.3450, backed by 1.35 and 1.3580. On the downside, support will emerge at 1.33, followed by 1.3280 and 1.3230. Additional losses will target subsequent floors at 1.32, backed by 1.3160 and 1.3120.

The dollar remains soft against its major rivals in the Tokyo session. The euro holds steady above 1.33 against the dollar, while the yen gave back some of its gains on Friday versus the dollar.

The greenback slumped to a 20-month low against the euro and a 14-year low against the sterling after a report on Friday showed U.S. manufacturing slowed in November. U.S. ISM index unexpectedly dropped from 51.2 to 49.5, the lowest level since April 2003. Interest rate futures showed traders were pricing in a 100% chance of a Fed rate cut to 5% in March 2007 after the weak ISM report.

Though Fed officials still mentioned inflation remains a risk, the negative sentiment of the dollar was not brought down. Chicago Fed President Moskow said on Friday that higher interest rates may be need to curb inflation. Fed Chairman Bernanke said the Fed is more comfortable with inflation between 1 to 2 percent. I think the Fed is more likely to keep interest rates unchanged early next year, however, we need some very strong key economic data to put the brake on the fall in the dollar in the dollar bearish sentiment.

Two key U.S. economic data due this week include November employment report and December University of Michigan consumer confidence.

Bank of Canada, Bank of England, and European Central Bank will announce their interest rate decision this week. They are expected to hold their interest rates unchanged at 4.25%, 5.00%, and 3.25% respectively.

EURUSD will face interim resistance at 1.3350 followed by 1.3370 and 1.34. Additional ceilings will emerge at 1.3450, backed by 1.35. Support starts at 1.33, backed by 1.3280, 1.3230 and 1.32. Subsequent floors are eyed at 1.3150.


Yen Weakened after Slower Capital Spending

The yen weakened from 115.20 to 115.80 after a report showed Japan's capital spending in third quarter unexpectedly slowed to an annual growth rate of 12.0%, worse than the estimate of 15.3%.

The market will look to Japan's October coincident index and leading economic index, both due on Wednesday, for more clues on the Japan economy outlook.

USDJPY encounters interim resistance at 115.80, backed by 116 and 116.30. Subsequent ceilings will emerge at 116.50, followed by 117. On the downside, support begins at 115.50 and 115.20, followed by 115. Additional floors are eyed at 114.50, backed by and 114.

At 7:00 AM Canada November Net Change in Employment (exp 12.0k, prev 50.5k) Canada November Unemployment Rate (exp 6.2%, prev 6.2%) At 10:00 AM US November ISM Manufacturing Index (exp 52.0, prev 51.2) US October Construction Spending (exp -0.3%, prev -0.3%)

Economic data remains the key point of focus for currency traders with the headline report due out later today at 10:00 AM. The November ISM manufacturing index is forecasted to edge up slightly to 52.0, compared with 51.2 from a month earlier. However, if yesterday’s reaction to the Chicago PMI report can be used as a barometer to sharply disappointing US data then any reading beneath the key 50-level -- which distinguishes between expansion and contraction, will trigger a renewed bout of aggressive dollar selling to fresh lows. On the flipside of that coin though, an upbeat ISM manufacturing report would offset the contraction in yesterday’s Chicago PMI and potentially prompt a flurry of profit-taking ahead of the weekend, in effect initiating a corrective bounce in the dollar.

Loonie traders will also focus on Canada’s jobs report due out at 7:00 AM. The Canadian dollar has been subjected to weakness recently given market perception that Canada’s economy will not be immune to further deterioration in US economic fundamentals. November net change in employment is seen at 12.0k, but lower compared with October’s growth of 50.5k. The unemployment rate for November is seen unchanged at 6.2%.

Euro Retreats after Hitting Fresh High

The euro advanced to a new high at 1.3280 in early European trading, but subsequently drifted off to test support near 1.3220. Profit-taking was the likely culprit in the euro’s decline given the steep run-up over the past week which saw gains of over 2.6% from last Friday’s low of 1.2940. The retreat does not alter the view that overall momentum remains bullish, but does highlight the pair’s susceptibility to a correction prior to resuming its trend higher.

Eurozone unemployment unexpectedly dipped to 7.7% for October, beating both consensus estimates and improving from last month’s 7.8% reading. Meanwhile, the November manufacturing PMI for the E-12 fell short of calls for an increase to 57.1, instead slipping to 56.6 compared with 57.0 from October. Of particular interest from the PMI report were input prices, which fell to an 8-month low and the employment index, which edged up to its second fastest growth rate in 6-years.

The euro continues to hold above 1.3220, with support starting at 1.32, followed by 1.3180 and 1.3130. Subsequent floors will emerge at 1.31, backed by 1.3060 and 1.3020. Meanwhile, gains will target the pair’s 20-month highs at 1.3280, followed by 1.33 and 1.3330. Further resistance will appear around 1.3365 and 1.34.

GBP Flirts with New Multi-Year Highs

Cable jumped out early on in the session to a fresh 14-year high at 1.9747, though relinquishing its gains in subsequent choppy European trading. Manufacturing data from the UK disappointed with the November CIPS manufacturing PMI down to its lowest level since March at 52.6, falling short of estimates at 54.0 and down from a month earlier at 53.5. The employment component fell to its lowest level since January and dipping into contraction at 47.6, compared with a reading of 50.0.

Yen Eases after Inflation Data

The yen drifted lower after a report showed Japan's consumer prices slowed in October, adding to the uncertainty of the Bank of Japan tightening outlook. Japan's national CPI unexpectedly fell 0.2% in October, worse than the estimate of a 0.1% decline. Further, Japan’s unemployment rate for October suggests sustained recovery in the nation’s economy, which hit an 8-year low at 4.1%.

Although the decline in CPI does not bode well for the prospects of another imminent rate hike, it is important to note that according to the BoJ’s Noda, consumer prices are not the only determinant of policy. With the next BoJ policy setting meeting slated for December 19th, markets will continue to scrutinize upcoming data from Japan. Of particular interest will be the BoJ’s Tankan report due out on December 15th.

The dollar extended its losses on Thursday trading as the market worries about the weakening U.S. economy and the Fed rate outlook after weak Chicago PMI.

U.S. incomes rose 0.4% and spending grew 0.2% in October, both are inline with the expections. U.S. PCE rose on an annual rate of 1.5% in October, the slowest growth rate since August 2002. Excluding food and energy, core PCE, rose 2.4% on a year-over-year basis. The dollar briefly edged up after the data, and the market looked to Chicago PMI due later.

The dollar slumped across the board after Chicago manufacturing PMI unexpectedly fell from 53.5 in October to 49.9 in November, well below the expectation of 54.5. The euro broke 1.32 level and climbed up to 1.3270 against the dollar and the yen strengthened from 116 to 115.50 versus the dollar.

Though the Fed is more likely to hold its interest rates than cut early next year, the concern over the U.S. economy put the dollar under pressure. After breaking major technical support levels versus its major rivals, the dollar may weaken further.

EURUSD will face interim resistance at 1.3250 followed by 1.3270 and 1.33. Additional ceilings will emerge at 1.3350, backed by 1.3370. Support starts at 1.3220, backed by 1.32, 1.3170 and 1.3150. Subsequent floors are eyed at 1.31.


Yen Steadies vs Dollar

The yen had an initial knee-jerk decline after a report showed Japan's consumer prices slowed in October, adding the uncertainty of Bank of Japan rate hike timetable. Japan's national CPI unexpectedly fell 0.2% in October, worse than the estimate of a 0.1% decline. However, a Bank of Japan official, Tadao Noda, yesterday said consumer prices are not the only one determinant of monetary policy. The yen moved back to its original level against the dollar later on.

Besides, Japan unemployment rate fell to an eight-year low at 4.1% in October.

Bank of Japan will hold a policy meeting on December 19. The market will scrutinize upcoming data from Japan, especially quarterly Tankan survey of business confidence due December 15, for more clues on whether Bank of Japan will raise rates to 0.5% in December or early next year. Once the market has more idea about the BOJ next move, the yen direction will be clear.

USDJPY encounters interim resistance at 116, backed by 116.30 and 116.50. Subsequent ceilings will emerge at 116.70, followed by 117. On the downside, support begins at 115.50 and 115.20, followed by 115. Additional floors are eyed at 114.50, backed by and 114.

At 8:30 AM US October core PCE m/m (exp 0.1%, prev 0.2%) October core PCE y/y (exp 2.3%, prev 2.4%) October PCE Deflator y/y (exp 1.4%, prev 2.0%) October Personal Spending (exp 0.1%, prev 0.1%) October Personal Income (exp 0.5%, prev 0.5%) Canada Q3 GDP annualized (exp 2.0%, prev 2.0%) Canada September GDP (exp 0.0%, prev 0.3%) At 10:00 AM US November Chicago PMI (exp 54.5, prev 53.5) At 6:30 PM Japan October National CPI ex-food (exp -0.1%, prev 0.0%) Japan October National CPI (exp -0.1%, prev -0.3%)

The dollar relinquished all of its previous session’s gains versus the euro and sterling during London trading, negating any positive momentum from Wednesday’s upbeat US GDP and Beige Book report. The selling that ensued pushed the greenback to fresh 14-year lows against the sterling at 1.9578 and falling just shy of the recent low versus the euro at 1.3210. Traders remain determined to test the bearish sentiment of the market, thus ignoring any recent dollar positive news such as hawkish Fed rhetoric and evidence that the US economy may be headed for a soft-landing.

The data deluge continues today with the releases of October core PCE, PCE deflator, personal spending, personal income and November Chicago PMI. The core PCE is forecasted to slip to 0.1% from 0.2% the previous month and down to 2.3% from 2.4% a year earlier. The deflator is expected to be lower at 1.4% compared with 2.0% previously. Personal spending and income are seen unchanged from their prior month’s readings. More importantly though, will be the Chicago PMI report due out at 10:00 AM, which will be viewed as a proxy to the manufacturing ISM report also scheduled for this week. Consensus forecast is for PMI to improve to 54.5, up from 53.5 from October.

Nevertheless, recent stronger-than-expected economic releases have been largely shrugged off, focusing instead on the negative reports – thus highlighting the overall bearish sentiment surrounding the dollar. Yesterday’s move higher merely provided traders with improved levels to sell the greenback, as those gains proved to be short-lived. Yet, we continue to remain cautious for a sharp corrective retracement from these already extended levels.

Sterling Powers ahead to new 14-year Highs

Cable advanced to a new high at 1.9578, a level not seen since 1992 on broadbased dollar negative sentiment. The pound remains buoyed on market expectations for further widening of the interest rate gap between the UK and US, with the Bank of England likely to further raise rates while the Fed is speculated to be on the brink of easing. Housing data revealed that the previous rate hikes have had little impact in cooling off the heated housing market, with UK’s November nationwide house price index up 1.4% m/m, and 9.6% y/y – which marks its highest annual rate since February 2005.

Comments from Bank of England officials earlier during the Testimony to the Treasury Select Committee fuelled expectations for additional tightening. BoE Governor King reinforced the strength of the UK economy, but said that inflation has picked up and remained above target. Also, King said the two voters in favor of a rate hike in the previous meeting were not doing so as insurance. Also, Bank economist Bean said there were slight upside risks to the inflation outlook. Recall previously that Bean had stated his preference for erring on the side of overshooting policy to ensure that risks to inflation were properly contained. The next BoE monetary policy meeting will take place next week on December 7th.

Euro Revisits 1.32-level on Positive Data

The euro climbed just pips away from its 20-month highs in overnight trading, reaching a session peak at 1.3210 and hitting a fresh all-time high versus the yen. Economic data from the Eurozone were upbeat, with the release of Q3 GDP and reports from Germany supporting the euro against the dollar and yen. Third quarter growth was largely inline with expectations at 0.5% on a quarterly basis and improving to 2.7% from 2.6% in the previous year.

The GDP report bodes well for the prospects of further ECB policy tightening given the sustainable improvement in economic growth in the region. While the ECB is widely anticipated to raise interest rates by 25-bp to 3.50% when it meets this month, the key question that lingers is how much further the ECB will tighten to contain inflation. ECB Board member Liebscher stressed that current high price stability must not result in complacency towards risk to inflation – highlighting the prospects for additional rate hikes in 2007.

Economic reports from the Eurozone’s largest economy were upbeat, as the number of unemployed in Germany dropped by more than expected at 86k in November. The unadjusted jobless rate fell to 3.995 mln and the unemployment rate dropped to 10.2% from 10.4% a month earlier. October retail sales improved to -0.2% from -2.9% a month earlier and to -0.8% versus -1.6% in the previous year.

The improving fundamentals further validate the euro’s ascent against the dollar given the divergence in economic data and monetary policy outlook between the US and the Eurozone. The dollar will succumb to additional selling pressure if the Fed succumbs to shifting its stance on monetary policy to focus on growth rather than risks to inflation.

Interim resistance is seen at 1.3220, followed by 1.3250 and 1.3275. Subsequent ceilings are eyed at psychological resistance at 1.33, backed by 1.3340 and 1.3380. Meanwhile, support will start at 1.3160, followed by 1.3130 and 1.31. Additional floors will emerge at 1.3080, followed by 1.3020 and 1.30.

The dollar rebounded after a government report showed the U.S. economy expanded faster than expected in the past quarter, supporting the view that the economy would have a soft landing and the interest rates will be held at 5.25% for some time.

U.S. GDP rose at a 2.2% annual rate in the third quarter, exceeding the forecast of 1.8% growth and improving from a 1.6% expansion rate in the previous quarter. The dollar gained from 1.3150 from 1.32 against the euro after the release of the report.

U.S. new home sales dropped slightly from 1075k to 1004k in October. Since that the housing market is cooling down is a fact which has already been expected by all, the market shrugged off the soft data.

The Fed¡¯s beige book released today showed most districts had moderate growth in the past two months and the Federal Reserve Bank of New York and Richmond reported accelerating growth. Based on the stronger-than-expected GDP and fairly good beige book report, it might be too early to assume when the Fed is going to cut rates. The dollar got a breathe after the release of strong economic data today.

The market will look to tomorrow¡¯s personal spending and income, an inflation indicator, PCE deflator, and Chicago PMI for more clue on the outlook of the U.S. economy.

EURUSD will face interim resistance at 1.3170 followed by 1.32 and 1.3220. Additional ceilings will emerge at 1.3250, backed by 1.33. Support starts at 1.3140, backed by 1.3120, 1.31 and 1.3050. Subsequent floors are eyed at 1.30.

GBPUSD encounters interim resistance at 1.95, backed by 1.9540, 1.9570 and 1.96. Subsequent ceilings will emerge at 1.9630, followed by 1.9650 and 1.9680. On the downside, support begins at 1.9450, followed by 1.9420 and 1.94. Additional floors are eyed at 1.9370, backed by 1.9350 and 1.93.


Yen Still Stuck in Range

Bank of Japan Governor Fukui said today that policy makers need to ensure economic growth and prices are stable. The yen is likely to get out of the current range and have a big rally once the market can see when the Bank of Japan will raise rates.

USDJPY encounters interim resistance at 116.30, backed by a key level of 116.50 and 116.70. Subsequent ceilings will emerge at 117 and 117.30, followed by 117.50. On the downside, support begins at 116 and 115.70, followed by 115.50. Additional floors are eyed at 115, backed by and 114.70.