The dollar hovers near highs versus the euro and the yen as the crude oil fell to the lowest since 2005. As the demand for fuel dropped due to the mild winter in the US, the oil prices fell below $55 a barrel.

US trade deficit due tomorrow is expected to widen slightly from 58.9 billion to 59.5 billion in November. Federal Reserve Chicago President Michael Moskow tomorrow may repeat Fed Vice Chairman Kohn's comment made yesterday that it is too early for the officials to relax on price pressures.

The euro sustained above the key level of 1.2970-80 against the dollar today with the support from a run of stronger-than-expected data from the euro zone. Germany current account balance rose from 11.6 billion to 12.5 billion in November, and its trade balance increased to 19.3 billion, far above the estimate of 16.4 billion. Also, Germany industrial production expanded on an annual rate of 6.0%, much faster than the forecast of 4.6% and the 3.4% reading in the previous month.

EURUSD will face interim resistance at 1.3040, followed by 1.3080 and 1.31. Additional ceilings will emerge at 1.3150, backed by 1.32. Support starts at 1.30, backed by 1.2970, 1.2950 and 1.29. Subsequent floors are eyed at 1.2880.


Yen Awaits BOJ

The yen weakens across the board though it is widely expected that the Bank of Japan will raise rates in next week's policy meeting. In the longer term, even BOJ lifts rates from 0.25% to 0.5%, the yen's low yielding still put the currency under pressure.

Japanese Finance Minister Koji Omi said yesterday in Washington that he had asked the Bank of Japan that their monetary policy should support economic growth but added interest rates were up to the central bank.

USDJPY encounters interim resistance at 119.50, backed by 119.80 and 120. Subsequent ceilings will emerge at 120.30, followed by 120.50. On the downside, support begins at 119 and 118.70, followed by 118.50. Additional floors are eyed at 118.30, backed by and 118.

At 2:00 AM Germany November Current Account Balance (exp 11.0-bln euros, prev 11.6-bln euros) Germany November Trade Balance (exp 16.4-bln euros, prev 17.3-bln euros) At 6:00 AM Germany November Industrial Production m/m (exp 1.0%, prev –1.4%) Germany November Industrial Production y/y (exp 4.6%, prev 3.4%) At 8:15 AM Canada December Housing Starts (exp 220.0k units, prev 224.9k units) At 7:30 PM Australia November Retail Sales (exp 0.3%, prev 0.8%)

The major currency pairs were off to a slow start this week given the dearth of market moving events early on. Traders will look ahead to central bank decisions from the BoE and ECB to further gauge the direction of global interest rate differentials. The dollar has benefited from recent US economic data prompting markets to reassess the timing of any monetary policy changes by the FOMC. The Fed’s Vice Chairman Kohn, in a speech yesterday, suggested it was still premature for the Fed to let its guard down against inflation, saying it was too early to determine that inflation is easing. His hawkish tone had little impact in FX trading, as most participants will continue to digest additional economic data and have pushed back their predictions for a Fed cut toward the second half of the year.

Yen Edges Lower as Japan Returns from Holiday

The yen drifted lower against the euro, sterling and dollar, relinquishing previous sessions’ gains as Japanese traders returned to their desks following yesterday’s holiday. Growing sentiment for a BoJ rate hike next week bolstered the yen and prompted profit taking in the carry trades since last week, but it remains to be seen whether additional tightening will materialize.

Earlier in the session, Japanese Finance Minister Omi reaffirmed the strength of Japan’s economy saying he expects it will pick up even greater momentum in the summer months during the election. Omi was confident on improving conditions in Japan, such as the jobs market, which will result in higher wages and ultimately stimulate domestic consumption. Short of calling an end to deflation, Omi did suggest that Japan was currently not experiencing deflation.

German Data Still in Focus

While yesterday’s November retail sales data from Germany fell short of expectations, it failed to garner any significant reaction among currency traders. In the session ahead, German economic data will continue to be the focus with the release of November trade balance, current account balance and industrial production. Given the improving trend from Germany, the risk is for an upside surprise in the data, particularly the IP numbers due out at 11:00 GMT (6:00 AM New York time).

The euro rebounded after testing the key technical resistance level at 1.2980 against the dollar. Without any important economic data due today, the dollar mainly consolidated in a range between 1.3010-1.3035 during the U.S. session.

The dollar fell slightly this morning after a gas odor spread from midtown Manhattan to downtown and New Jersey. New York City Mayor Michael Bloomberg later said at a press conference that there is no health risk to residents.

Federal Reserve Vice Chairman Donald Kohn said today in Atlanta that it is still too early for officials to relax their concerns about price pressures. He also mentioned that recent upbeat employment data suggest no signs of cumulating weakness in manufacturing or services sectors and the economy should expand by the second half of this year. Recall that the dollar rallied across the board last Friday after the labor department job report showed 167k new jobs were created in December, surprising many in the market who expected a reading of only 100k.


EURUSD will face interim resistance at 1.3040, followed by 1.3080and 1.31. Additional ceilings will emerge at 1.3150, backed by 1.32. Support starts at 1.30, backed by 1.2980, 1.2950 and 1.29. Subsequent floors are eyed at 1.2880.

Yen Firm Ahead of BOJ

The yen is supported as investors await next week's Bank of Japan policy meeting. In the longer term, even BOJ lifts rates from 0.25% to 0.5% in January, the yen's low yielding still put the currency under pressure.

USDJPY encounters interim resistance at 119, backed by 119.30 and 119.50. Subsequent ceilings will emerge at 119.70, followed by 120. On the downside, support begins at 118.60 and 118.40, followed by 118.20. Additional floors are eyed at 118, backed by and 117.50

At 2:00 AM Germany November Retail Sales m/m (exp 1.0%, prev –0.5%) Germany November Retail Sales y/y (exp 0.3%, prev –0.8%) At 6:00 AM Germany November Factory Orders m/m (exp 1.5%, prev –1.1%) Germany November Factory Orders y/y (exp 5.6%, prev 10.0%) At 10:30 AM BoC Q4 Business Outlook Survey (exp 2.0, prev 3.0) At 12:45 PM Fed’s Kohn Speaks

The biggest gainers of last week, the dollar and yen, kicked off trading on firmer ground against their overseas counterparts amid early thin trading conditions – with Japan closed for holiday. The greenback benefited from Friday’s unexpectedly strong non-farm payrolls number, climbing to its highest level against the euro since late November and breaching the 1.30-mark. Given the recent slate of improving US economic data – such as jobs, housing, and manufacturing reports, traders are reassessing the chances of an FOMC rate cut in the first quarter and instead looking to the second half of the year for a change in the Fed’s stance. Incoming economic releases will continue to be closely scrutinized particularly due to the Fed’s cautiousness against further decline in the economy, as revealed in its latest minutes.

This week’s US economic calendar is light, with the release of November trade deficit, December retail sales, and November business inventories. The trade deficit is forecasted to edge up to $59.5-bln, from a month earlier at $58.9-bln. US retailers have been reporting disappointing holiday sales in recent earnings releases and will likely also be reflected in this week’s December retail sales report, which is forecasted to fall to 0.7% from 1.0%. The excluding-autos retail sales figure is seen posting a larger decline to 0.6%, off from 1.1% in November. Particular focus will shift to domestic consumption reports to further gauge any spillover impact from the slowing sectors of the economy. The Fed will become more susceptible to a rate cut if there is evidence of additional deterioration as a result of declines from housing and manufacturing.

Germany’s Data, ECB in Focus

Improving economic fundamentals in Germany have raised the scope for additional rate hikes from the ECB without fear of impeding on growth. The string of stronger-than-expected reports, including Germany’s unemployment and Ifo, will likely continue this week as markets await the releases of November retail sales, factory orders, industrial production, and annual GDP growth. Further, the steadily rising growth trend in the Eurozone’s largest economy will likely also enable it to absorb the VAT tax hike unperturbed. Close analysis of January’s data will provide clues on the immediate impact of the newly implemented tax hike.

The ECB will deliberate monetary policy this week, with the decision expected on Thursday at 7:45 AM. Although the Bank is not seen raising rates from 3.50%, markets will pay close attention to the subsequent press conference from ECB President Trichet for clues on the timing of additional policy tightening. Given the Bank's policy of transparency any Q1 rate hike will likely be communicated at this week's press conference.

The dollar rallied after a government report showed the U.S. economy added more than expected jobs in December. The non-farm payrolls rose from 132k to 167k last month, beating the forecast of 113k. The unemployment rate remained unchanged at 4.5%. The average hourly earnings increased 0.5%, well above the estimate of 0.3%. Recall the ADP job report released this Tuesday indicated a surprising 40K decline of jobs in private sector, making the market downwardly adjusted the forecast for today's job report from the Labor Department. The unexpectedly strong job report ensured investors the labor market is still tight and reduced the expectations for a Fed rate cut anytime soon. The euro dropped from around 1.3085 and kept testing the key psychological level at 1.30. The sterling was down more than 100 points to 1.93.

EURUSD will face interim resistance at 1.3040, followed by 1.3080and 1.31. Additional ceilings will emerge at 1.3150, backed by 1.32. Support starts at 1.30, backed by 1.2980, 1.2950 and 1.29. Subsequent floors are eyed at 1.2880.


Yen Gained Overnight

The unwinding of short yen positions in carry trades pushed the yen up across the board overnight. The euro, sterling and aussie all came off from the highs against the yen, and the dollar also weakened to 118 versus the yen. Since the yen short positions are still huge in the market and the expectation for a BOJ rate increase in January has not been ruled out yet, the yen is supported in the near term.

USDJPY encounters interim resistance at 119, backed by 119.30 and 119.50. Subsequent ceilings will emerge at 119.70, followed by 120. On the downside, support begins at 118.60 and 118.40, followed by 118.20. Additional floors are eyed at 118, backed by and 117.50

CAD Rose on Strong Job Report

The loonie gained against the dollar on a better-than-expected job report. Canada unemployment rate dropped from 6.3% to 6.1%. The net employment change reached 61.6k, up from 22.4k in the previous month and beating the forecast of 16.5k. The Canadian dollar gained from 1.1785 to 1.1730 versus the dollar. Another report released later showed Canada Ivey PMI dropped below 50 in December.

USDCAD will face resistance at 1.1780, followed by 1.18 and 1.1830. Additional ceilings will emerge at 1.1850, backed by 1.1880 and 1.19. Support starts at 1.17, backed by 1.1670, 1.1650 and 1.1620. Subsequent floors are eyed at 1.1550, backed by 1.15.

At 4:30 AM UK December Services PMI (exp 59.5, prev 59.8) At 5:00 AM Eurozone November Retail Sales m/m (exp 0.5%, prev 0.3%) November Eurozone Unemployment Rate (exp 7.6%, prev 7.7%) Eurozone December Consumer Confidence (exp –7, prev –7) Eurozone November PPI m/m (exp 0.1%, prev 0.0%) At 7:00 AM Canada December Net Employment Change (exp 16.5k, prev 22.4k) Canada December Unemployment Rate (exp 6.3%, prev 6.3%) At 8:30 AM US December Non-Farm Payrolls (exp 113k, prev 132k) US December Unemployment Rate (exp 4.5%, prev 4.5%) At 10:00 AM Canada December Ivey PMI

The greenback continues to creep higher against the majors, firming to 8-month highs against its Canadian namesake and remaining stronger versus the euro and sterling. A combination of improving economic fundamentals and declining oil prices have contributed to the dollar’s gains versus the Loonie, which climbed near the 1.18-level at 1.1775, it’s highest since April 2006.

The closely anticipated December US labor report is due out at 8:30 AM, with expectations for non-farm payrolls seen declining to 113k from 132k. Recall earlier in the week, the release of the ADP private sector payrolls report, which posted a 40k decline for December, triggered a knee-jerk reaction lower in the dollar. The unemployment rate meanwhile, is forecasted to remain unchanged from the previous month at 4.5%. Labor market activity will be closely scrutinized for dual purposes of gauging US economic health and inflationary pressure.

A tightening jobs market would underpin the soft landing scenario, but would also suggest increasing wage pressure – thereby keeping the Fed on hold for greater duration. However, if there is evidence of spillover from deteriorating housing and manufacturing sectors, coupled with further easing in commodity prices, the Fed’s timeline for policy easing may be accelerated, which would ultimately weigh on the dollar.

BoJ Rate Hike Speculation Prompts Profit Taking

Rumors about the heightened possibility for a 25-bp rate hike from the Bank of Japan when it meets next week triggered a bout of profit taking in the carry trades, bouncing off record-lows against the euro and multi-year lows versus the sterling. A report from a Japanese newspaper earlier in the week suggested the BoJ would mull over a rate hike in its January meeting, triggering sharp declines in Japanese government bonds, as the 10-year JGB dipped to its lowest level since October.

Euro Extends Slide

The euro came under renewed selling pressure against the yen and dollar over recent sessions. From a fundamental perspective, we continue to favor a stronger euro given the backdrop of improving Eurozone economic fundamentals and scope for additional monetary policy tightening from the ECB.

In the session ahead, traders will digest further economic reports from the Eurozone beginning with the release of November retail sales, unemployment, confidence surveys and producer price index.

Support for EURUSD starts at 1.3060, followed by 1.3030 and 1.30. Additional losses will encounter floors at 1.2960, backed by 1.2920 and 1.29. A move past the 1.31-figure will target 1.3130, followed by 1.3160 and 1.32. Subsequent ceilings are seen at 1.3240, followed by 1.3270 and 1.33.