Jan. 2, 2007 — The dollar begins the New Year on a weak footing, reaching three-week lows against the euro, 15-month lows against the Aussie, while struggling against the yen and sterling. Both the Euro zone and the UK manufacturing purchasing managers’ indexes fell to nine-month lows in December. But these indexes remain higher than their U.S. counterpart, which is due later this morning, does.
Markets in Japan are closed officially until Thursday, but activity is not expected to pick up until next week. U.S. markets will be closed in observance of national day of mourning for President Gerald R. Ford. Consequently, the December release of the U.S. ISM manufacturing report and the minutes of the December FOMC will be delayed to Wednesday.
Euro slated to make first three-week winning run in eight months
Shrugging weak PMI figures, EUR/USD breaks above the key 1.3220 resistance and is slated to complete its third-consecutive winning week, a pattern not seen since May 2005. The Euro zone manufacturing sector as measured by the purchasing managers' index slipped to a nine-month low of 56.5 in December from 56.6 in November, undershooting expectations of 56.9. Input prices also fell to a nine-month low of 62.9, while output prices rose to a three-month high of 55.9. The employment sub-index dropped to 52.7 from 52.8 in November, while new orders fell to 57.8 from 58.4. The individual national PMIs strengthened in Germany (rose to 59.4 from 58.3) and Italy (rose to 55 from 54.8), but weakened in France (fell to 54.2 from 56.5).
This week’s ISM reports on manufacturing and services will be crucial in determining the euro’s momentum towards last year’s 1.3367 highs. The key components in Friday’s release of the January employment payrolls will be the retail and manufacturing sectors, as these should determine the tone of the overall report.
EUR/USD expected to retreat towards the 1.3250s, where it will find preliminary support, followed by 1.3220. Resistance seen starting at 1.3270, followed by 1.3290 and 1.3320.
USD/JPY bearishness seeks confirmation USD/JPY may be set to end the week lower after four consecutive weekly increases as traders remain cautious in bidding the pair to new highs. Speculation of Bank of Japan rate hike this month and cautiousness ahead of this week’s key U.S. releases (ISM reports on manufacturing/services and non-farm payrolls) are weighing on the pair. Although the pair is near its session high of 118.83, the low of the day stands at 118.50, a bearish development for the next session.
We see the risks titled to the downside for USD/JPY, with preliminary support standing at 118.50, followed by 118.25-30. Only an unexpected strength in this week’s ISM figures would be instrumental in triggering fresh momentum towards the 119.20-25 territory, which carries the potential towards 119.50.
Cable’s gains inconclusive
Sterling’s gains versus the dollar are largely a result of a broad-based retreat in the greenback. The UK version of manufacturing PMI fell to a nine-month low, slipping to 51.9 in December from a downwardly revised 52.5 in November. Consensus forecasts were for a rise to 53.0. Input prices hit a 16-month low at 58.3 from 62.5 in November, while the output prices sub-index dropped to 53.5 from 53.8.
Despite lingering expectations of one more rate hike from the Bank of England, cable’s medium-term prospect relies largely on the U.S. data and the outlook for the Fed. Fading speculation of a March rate cut should contribute in capping cable’s gains at the 1.98 figure, unless unexpectedly weak payrolls emerge from the United States. The only prospect for this to occur is for retail payrolls to reverse their holiday sales gains as early as the January report. We do not expect these gains to be fully reversed until the February report.
Cable seeks support at 1.9680, followed by 1.9655-60. Upside capped at 1.9750, followed by 1.9780.
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
