Jan. 3, 2007 — The dollar is paring gains posted in the European session after the ADP report released minutes ago showed a forecast for December private payrolls falling by 40,000 jobs following an increase of 158,000 in November. Recall that the November ADP report estimated an increase to 158,000 in private payrolls from 128,000 in October, correctly predicting the direction of the November non-farm payrolls, which showed an increase to 132,000 from 79,000 in October. Thus, if the 40,000 decline in private (non-government jobs) is predicted correctly, or at least correct in direction, then a contraction in private jobs in Friday’s payroll report would significantly elevate chances of a Fed rate cut as early as March and weigh significantly on the U.S. currency.
The dollar, however, remains up on the session on a combination of further declines in oil prices and cautiousness ahead of key U.S. economic reports, which could further dissipate expectations of a first quarter Fed rate cut. Prices of crude oil fell by more than 80¢ to $60.30 per barrel due to mild temperatures. Falling oil prices are increasingly seen as a booster to the U.S. consumer, which has been the principal force in preventing U.S. growth from nearing negative territory.
Due at 10:00 am is the ISM manufacturing report, expected to have edged up to 50.0 in December from November’s three-and-a-half year low of 49.5. The rebound in the Chicago PMI to 52.4 in December from November’s 49.9 is tempering worries of another sub-50 figure in today’s ISM. It is important to scrutinize the components of the report, such as new orders, employment, production and inventories, all of which fell below the 50 level in November. The prices paid index was the only major component showing a rebound, rising to 53.5 from 47. Thus, we could see modest dollar gains in the event that the headline ISM does rebound above 50 while the most of the said components remain below 50.
Also due at 10:00 am are November construction spending, expected down 0.5% from -1.0%.
At 2:00 pm, the Federal Reserve will release the minutes of the Dec. 12 Federal Open Market Committee (FOMC) meeting, which kept the policy statement largely unchanged, except for altering its assessment on the cooling in the housing sector as “substantial.” It is worth noting that Jeffrey Lacker, the sole dissenting member at the meeting will no longer be a voting member in 2007 and neither will Janet L. Yellen, president of the San Francisco Federal Reserve Bank, nor Cleveland Fed President Sandra Pianalto. Chicago Fed’s Michael H. Moskow , Boston Fed’s Cathy E. Minehan and St. Louis Fed’s William Poole will become voting members in 2007.
Euro stabilizes on ADP EUR/USD is up nearly half a cent to 1.3250s following the ADP report forecasting a contraction in December private payrolls. A modest rise in the ISM could extend the euro’s gains towards the 13290 resistance.
The euro was weak earlier in the European session despite a 108,000 decline in German December unemployment, overshooting forecasts of a 50,000 decline. The jobless rate fell to 9.8% from a downwardly revised 10.1% in November, versus expectations of 10.2%.
Separately, German think tank DIW Institute raised its projections for Germany’s 2007 GDP growth to 1.7% from 1.4%, while expecting inflation rising to 2.5% in 2007 from 1.8% in 2006. It also expects the ECB to lift rates to as high as 4.00% in 2007 from their current 3.50%. But the DIW expects Euro zone GDP growth to slow to 2.2% in 2007 from 2.6% in 2006, while inflation is to slow to 2.0% in 2007 from 2.00% in 2006.
Considering the euro’s changing momentum after the ADP, we see interim resistance starting at 1.3280, followed by the 1.3340 trend line resistance. We would have to see an ISM figure as high as 52-53 for the pair to retest the 1.3210 support. Subsequent backdrop is seen standing at 1.3170.
Firm USD/JPY shrugs BoJ noise
USD/JPY drops to 119.12 from 119.40s following the ADP report. The ensuing uncertainty regarding the Bank of Japan’s January meeting continues to boost the pair on the argument that even a rate hike would be signaled extra carefully to prevent notable yen gains. This means that downside surprises in U.S. data should be the main source of further pullback in the pair.
We expect any dollar gains from the ISM to be initially capped at 119.50. Any further gains beyond that point are seen vulnerable to potential downside ahead of Friday’s payrolls. Support remains at 118.50, followed by 118.25-30.
Aussie saved by ADP A 40-pip decline in AUD/USD to 0.7935 was interrupted by the dismal ADP report. We view the Aussie’s gains versus the USD to be largely a on the back of euro strength as opposed to improved fundamentals in Australia. The Aussie’s relative strength to the Canadian dollar is explained by falling oil prices, whose negative impact is more notable on CAD. The significant drop in the four-hour candle tick reflects the lack of confidence in the pair. But the pair does have the potential of regaining the 0.7970s, as the dollar is unlikely to shake off worries ahead of Friday’s payrolls. Interim pressure follows at 0.7820. Key support stands at 0.7930 and 0.79.
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
