Dec. 21, 2006 — The dollar is modestly higher against the euro, sterling and yen as oil prices come off their $64.10 highs. Markets await a round of U.S. economic reports that could shed new light on the manufacturing and the jobs picture. The GDP and retail sales data from Canada will also key in setting the tone on the latest bearishness in the USD/CAD rate. (See more below).
At 8:30 am, U.S. jobless claims are expected to have risen by 315K last week after slowing to 304K in the prior week. The dollar may be boosted by any figure lower than 310K-315K, but could be pressured by figure higher than 320-325K. Yet, the overall U.S. dollar reaction could also be influenced by the final reading on U.S. Q3 GDP (also at 8:30 am) in case we get an unexpected figure well above or below the consensus forecast of 2.2%. The consensus estimate of 2.2% would be the lowest reading since Q4 2005. Traders will also keep an eye on the personal consumption component of the quarterly GDP report, which came in at 2.9% in the preliminary Q3 report, following 2.6% in Q2. Any upward revision in consumption should be dollar positive even if it leads to a negligible upward revision in the final figure.
Also at 8:30 am are Canada’s GDP and retail sales for October. The GDP figure is expected to recover 0.1% from September’s -0.3%. Retail sales are expected to have slowed their decline to -0.5% from -1.2% in September, while sales excluding autos are seen down -0.2% from -0.9%. CAD traders must especially watch these figures as they could potentially extend the drag on the daily USD/CAD chart. See more below in the USD/CAD section.
The U.S. Leading Indicators index (10:00 am EST) is expected to have edged up by 0.1% in November, from 0.2% and 0.4% in October and September respectively. Although this report is normally not a market mover, it could make a difference if it comes in below zero, as it would be the first negative headline number since the -0.3% registered in August.
Due at 12:00 pm EST, the important Philadelphia Fed survey of business conditions —a carefully watched barometer of business conditions in Delaware, New Jersey and Pennsylvania. Since these areas are predominantly known for their manufacturing businesses, it will be crucial in determining the latest state of heavy industry in the region. The headline index is expected to have edged down to 4.0 in December, from 5.1 in November, after registering two negative figures in October and September. Markets will also watch the subcomponents on prices paid (fell to 26.7 in November), new orders (slumped to -3.7 in November) and employment (slowed to 0.2 from 9.4).
The hawkish president of the Richmond Federal Reserve Richard Lacker will speak at 1.00 pm on the economic outlook and can be expected to maintain his preoccupation with inflation. But this should provide with only passing interest since Mr. Lacker will not vote at next year’s rate-setting FOMC panel.
Euro risks further pull back EUR/USD appears toppish after having failed to break the 1.3220s yesterday. The personal consumption component of the U.S. GDP report and weekly jobless claims may help further drag on the pair towards the preliminary support of 1.3160. Subsequent declines are seen stabilizing at 1.3125-30 until the release of the Leading Indicators and the Philly Fed survey later in the day. A strong showing in these reports may have the potential in triggering the 1.3100 figure. Upside remains capped at 1.32, with the 1.3225-30 seen acting considerably.
Has USD/JPY topped?
USD/JPY is regaining the 118.20s after an earlier decline to 117.95 following stronger than expected November merchandise trade surplus at ¥915.9 billion yen beating forecasts of ¥600.0 billion. There was also strength in Japan's October all-industry activity index showing a better than expected increase of 1.7% following a decline of 0.8%.
Despite these reports, we have not yet abandoned our expectations for renewed USD/JPY strength, as we maintain the odds for 118.70 before week’s end at 80%. Friday’s key releases from the United States could be instrumental in feeding fresh market momentum in the dollar pairs. USD/JPY support stands at 118.00, backed by 117.80 and 117.65-70. Upside capped at 118.35-40, followed by 118.50. Key resistance stands at 118.80.
USD/CAD awaits retail sales, GDP The latest current rebound in USD/CAD towards the 1.15 may be capped at 1.1520 and risks in being reversed towards the 1.1470s in the event of seeing a figure of at least 0.1% in Canada’s October GDP and September retail sales of no worse than -0.5%. Although the U.S. dollar pairs may appear relatively bullish against the European FX, we could expect further pullback against the CAD in the next 4-5 days. Thus, with USD/CAD capped at 1.1520, we could expect declines towards the 1.1465-70, before further selling reaches the 1.14 by mid next week.
Cable eyes $1.9550 Sterling was sold off as Q3 GDP came in as expected at 0.7% q/q and Q3 current account deficit rose to GBP 9.48 billion, worse than the expected GBP 7.8 billion. Although the y/y GDP grew to 2.9%, cable lost nearly a full cent to 1.9620s. The technical picture remains negative for the pair, and the recent gains have been an opportunity for renewed pullback towards 1.9590 and 1.9550--the 61.8% retracement of the rise from the Dec 18 low. Upside capped at 1.9640.
Ashraf Laidi Chief FX Analyst CMC Markets US 140 Broadway, 30th Floor New York, NY 10005 (212) 644-4220 (212) 644-4222 a.laidi@cmcmarkets.com
