Dec. 26, 2006 — The dollar holds on to Friday’s gains in thin holiday trade, as European markets are shut, leaving what will be lethargic trading activity in U.S. trading. Benign inflation data from Japan kept the yen at the 156.00 record low territory against the euro and two-month lows against the dollar at 119 on expectations that the Bank of Japan will continue refraining from raising interest rates. Crude oil is up by nearly 80¢ to $63.30 per barrel after Iran said it would defy Saturday’s UN resolution, voting to impose sanctions on the oil producer if it refused to suspend uranium enrichment. The resolution revolved around commercial sanctions, which were deemed insufficient by the United States. Escalating violence in Nigeria is also adding concerns over global oil supplies.
Despite being a holiday-shortened week, traders will find no shortage of U.S. data as Tuesday kicks off a round of U.S. housing-related data, starting with November new home sales. Thursday’s releases include weekly jobless claims, consumer confidence, existing home sales and the Chicago Purchasing Managers Index (PMI). The importance of the housing figures combined with relatively thin trading could produce sharp price swings, in case of unexpectedly strong or weak data. This is especially important since last week’s U.S. reports data showed the lowest annual core Personal Consumption Expenditure Index (PCE), the Fed’s preferred inflation gauge, in six months and the weakest Philly Fed survey in more than three-and-a-half years. With the core PCE price index at 2.2%, it has lifted the real Fed funds rate to 3.05%, its highest level since March 2001. At such a high real fed funds rate, the Federal Reserve can now afford to worry about the deteriorating state of manufacturing and housing.
EUR/USD drifts above 1.31
With Western European markets closed on Monday, EUR/USD lacks the necessary impetus for trading outside of the 1.3110-1.3160 range. The round of U.S. releases later this week could be crucial in guiding the pair below the key 1.3100 figure, which could call up 1.3075-80. We expect further prolonged pressure on the euro as long as the U.S. figures on new home sales and existing home sales continue to divert from one another on a monthly basis. A sharp run-up in oil prices could drive the euro higher, testing the 1.3170 and 1.32.
USD/JPY reaches 119
Yen weakness prevailed after Japan’s core Consumer Price Index (CPI) rose 0.2% in the year ending in November, making its sixth straight monthly increase. The overall CPI rose by 0.3% year-over-year from October’s 0.1%, posting its seventh consecutive monthly increase. Tokyo core CPI rose 0.2%, less than the 0.3% forecast. The inflation data did not seem large enough for the Bank of Japan to hint at higher rates after Governor Fukui described the reports on inflation and consumer as weak and that the bank must examine more data before deciding when to raise rates.
On the bright side, household spending showed a softer than expected decrease, falling 0.7% in the year ending in November. Although it was the eleventh-consecutive monthly decline, the drop was lower than the -1.5% forecast. The unemployment rate fell to 3.99% in November, undershooting forecasts of a 4.1% rate. But the notable decline in the jobless rate has had little impact in lifting wage growth and consumer demand, prompting the central bank to downgrade its assessment of the economy last month, and to delay the much anticipated rate hike. The central bank last raised rates in July, which was the first increase in seven years. Today, Japanese bond yields are at nine-month lows of 1.57%, prompting continued declines on the yen. We lift our projected resistance to 119.25-30, followed by 119.45-50. Support is seen limited at 118.70 and 118.50.
USD/CAD hits eight-month high
USD/CAD edges out gains to 1.1590, the highest since April, shrugging off the rise in oil prices and soft U.S. inflation. Data weakness in Canada is magnifying the gains the pair, making the 1.1610 as the next challenging target. We expect the pair to defy the rest of the USD pairs, projecting initial support at 1.1565-70, followed by 1.1540. We expect further losses towards 1.1520.
Ashraf Laidi Chief FX Analyst CMC Markets US 140 Broadway, 30th Floor New York, NY 10005 (212) 644-4220 (212) 644-4222 fax a.laidi@cmcmarkets.com
