The biggest events on the table this week are US non-farm payrolls and Greenspan’s testimony on the state of the US economy. Payrolls are expected to rise by over 200k in the month of February. Economists are expecting the recent trend of low jobless claims to fuel strong job growth. Meanwhile, the Fed Chairman is not expected to make any blockbuster announcements or shed any light on Friday’s non-farm payrolls report. He is however, expected to confirm the need for a continued measured pace of tightening over the next few months, especially following yesterday’s bullish comments from Fed President Santomero. We want to continue to alert our traders to the end of Greenspan’s tenure in January 2006. Although the market still thinks that it may too early to speculate about a suitable replacement, the fact that traders around the world latch onto every word that Greenspan does or does not say, makes it particularly interesting to see who could possibly be a suitable replacement for such an esteemed man. Uncertainty surrounding the future of sound US monetary policy could weigh on the dollar later this year.

TECHNICAL OUTLOOK

EUR/USD

Market Recap. After a strong break to the upside, through the 1.3100 handle, the pair found initial resistance at the 1.3250 level (top of 2005 range), where selling pressure forced mostly sideways trading thereafter. Bids were seen as high as 1.3279, defining the top of the new range which has recently been supported by the 1.3150 area.

Short-Term. The price action seems to have stabilized around the 1.3200 handle, which represents the 50% Fib line from the 2005 range. Now that the pair remains well above the psychologically significant 1.3000/20 area, it appears that the bout of dollar strength seen at the beginning of the year may have come to an end for the near-term. We would look for a move above the 1.3250 level, which could provide the catalyst for a move higher towards 1.3312 (61.8% Fib, ’05 range) and then the 1.3400/50 area. To the downside, we see the 38.2% Fib (2005 range) at 1.3090 to be the next formidable support below the recent spike low at 1.3146.

Long-Term. Currently, the pair is supported by the 38.2% Fib (Sep ’04 – December ’05 range) at 1.3020. A break lower could expose major support at 1.2629, which represents the 61.8% Fib from the same range. Also significant is the 1.2500 handle, which is not only significant psychologically, but also coincides with the long-term trendline (up from 2002). It would be feasible to see a continued move down to 1.2500 before seeing a resumption of the long-term uptrend. A break of the all-time high of 1.3666 would be necessary to see a move higher towards the next target at 1.4000.

EUR/USD Weekly Chart

Source: eSignal

Source: eSignal

GBP/USD

Market Recap. For the first time in more than two months the cable traded above the 1.9000 handle, forming a new range just above 1.9150 (61.8% Fib, Dec. ’04 – Feb. ’05 range). As the pair began to reach overbought levels in the short-term, sellers came in around the 1.9250 level, providing strong resistance. The price reached as high as 1.9261 before trailing off slightly to consolidate around the 1.9200 handle.

Short-Term. The aforementioned 1.9250 level should be a key determinant for a move higher towards 1.9350 and 1.9400 (Dec. ’04 resistance) and could determine the near-term direction of the pair. A move below the current support at 1.9150 could pave the way for a move lower back below 1.9000/30, and further support is viewed to exist moderately around the 38.2% Fib (Dec. ’04 – Feb. ’05 range) at 1.8908.

Long-Term. Now that 1.9150 has been breached to the upside, we view a move past the top of 1.92-1.94 range as significant for a move higher. The 12-year high of 1.9548 stands as major long-term resistance for the pair, and resists a further move toward 2.0000. The high for the past 2 decades is 2.0100. To the downside, we have the 50% Fib (May – Dec. range) and the former H+S line at 1.8450, which provides a barrier for a move towards the psychologically significant 1.8000 and the 2004 low of 1.7450.

Source: eSignal

USD/CHF

Market Recap. The Franc has posted large gains over the past several days, due to a break of key support at 1.1782 (50% Fib, 2005 range) which allowed the pair to fall more than 200 pips. 1.1600 provided psychological support and capped the recent move in the USD/CHF. After seeing a slight bounce back up towards 1.1750, the pair has since consolidated around the 61.8% Fib (2005 range) at 1.1668.

Short-Term. The current resistance at 1.1668 could be critical in determining the near-term direction. To the upside, we have 1.1782, which now serves as resistance, and a further move could test the 38.2% Fib (2005 range) at 1.1897. A move lower from current levels could expose the 1.1550 level, which was significant in Dec. ’05.

Long-Term. We previously viewed the 61.8% Fib (2005 range) at 1.1668 as potential for strong support. This level also served as noteworthy resistance earlier in the year. As the price has broken below this level, we will look to see if the pair can make a confirmed break lower. As the all-time lows at 1.1100 and the 1.1300 area held as multi-year lows, these levels continue to be of great significance, and should be the most heavily watched to look for a move further down. On the upside, strong resistance holds the pair at 1.2250, which proved to be a pivotal resistance point earlier in the month. Further resistance exists at 1.2460 (38.1% Fib from ’03 – ’04 Range) and 1.3000 (psychological). The confluence of resistance at 1.2460 with the major trendline creates extremely strong resistance for the long-term direction.

Source: eSignal

USD/JPY

Market Recap. The 104.00 figure held as solid support, which caused the pair to bounce hard back up to 105.50, defining a 150-pip range for the majority the past several days. The pair traded as high as 105.58 before sellers came in strong to push the price back to previous levels.

Short-Term. We continue to view the 104.00/20 area, (61.8% Fib, Dec. ’04 – Jan ’05 range), as near-term support, and a break lower could open the door to 103.20, which was recent resistance and the 38.2% Fib from the 2005 range. Now that the pair has failed to close above 105.50, this could serve as more appropriate resistance than the previous 105.80 level. Throughout this month the range has been clearly defined between the 104.00 and 106.00 figures.

Long-Term. We will continue to look for a break of major resistance at 107.76 (Fib from Oct.-Dec. Range), as this could pave the way for a larger move to the key 110.00 area, which supported a large area of consolidation/congestion for the majority of 2004. The 102.00 and 101.65 levels, which has not been breached in 5 years, remains as solid support and a move through these levels. Both of these levels would create significant hurdles before we see a move further down to 100.00.

KEY EVENTS LAST WEEK:

• Reserve Bank of Australia Raises Rates Quarter Point
• Dollar Plunges on Comments from Korea
• Consumer Demand Picks Up in Japan While Prices Stay Low

Reserve Bank of Australia Raises Rates Quarter Point

For the first time in 15 months, the RBA raised rates by a quarter of a point to 5.50%. Higher than expected consumer prices have sparked concerns about rising inflation. With unemployment at a 28 year low, the central bank has moved to tighten monetary policy in an attempt to stem a potential buildup in wages and to “reduce the risk of an unacceptable rise in inflation.” Although higher rates will help to spur demand for the Australian dollar, unspectacular GDP growth will keep the RBA relatively conservative. The central bank is expected to carefully monitor the trend of economic data. If data continues to be mixed, the outlook for future rate hikes will remain murky. Yet, it is important to note RBA Governor Ian Macfarlane’s view on the issue. He believes that GDP growth figures are “understating” the strength of the economy.”

Dollar Plunges on Comments from Korea

Last Tuesday, Korea joined the chorus of central banks who have already signaled that they will need to diversify their reserves more appropriately to reflect their changing trade activities. As early as last year, we had talked about the emergence of the euro and the retreat of the dollar as a major reserve currency and how this will be a big theme for the currency markets in 2005 and beyond. Although Korea said that they would probably be diversifying to higher yielding currencies such as the Australian dollar, the US dollar’s status as the world’s premiere currency is still at risk. After this major announcement, the dollar sustained significant losses, which were partly recouped the next day following comments from a number of Asian central banks in response to the market and the press’ reaction to South Korea’s announcement. The Bank of Korea came out and attempted to clarify their comments by saying that they do not plan to reduce their US dollar holdings. Japan followed up Korea’s comments by saying that too they have no plans at present to diversify their reserves while Taiwan on the other hand indicated that they have not been selling dollar. However, there is no doubt that at least Japan has pared back and to some extent even stopped buying US treasuries. The markets are particularly sensitive to comments by these central banks since Japan, Korea and Taiwan represent 3 of the world’s largest owners of US treasuries. Yet despite these comments from Asian central banks, there is no doubt that reserve diversification is still occurring. Russia, South Africa, India and other Middle East oil exporters have already been gradually diversifying their reserves. Even without diversification, a cutback in demand by countries that were previously big buyers can still have huge ramifications for the US dollar. We expect this trend to continue and for it to be another thorn in the side of the US dollar, much like the country’s twin deficits are at the moment.

Consumer Demand Picks Up in Japan While Prices Stay Low

Last Wednesday, government reports on nationwide department store sales for the month of January reflected a 0.9% increase, the first in a year, beating the consensus estimate for a decline of 0.5%. This particularly may suggest brighter horizons may be forthcoming as sales data plummeted 2.6 percent in the previous month. The next day’s CPI data didn’t reflect increased consumer demand, however, as prices dropped 0.3%, the fastest pace since May. Tokyo’s prices fell at an even faster pace as core figures dipped 0.5%. This follows December’s -0.2% change, giving strong evidence that deflation is definitely not on its way out. Friday brought good news again for Japan with retail sales higher by 2.2%, the biggest leap in 4 years, as the figure skyrocketed 5.7 percent in the monthly comparison. Additionally, improvement in industrial production, housing starts and construction orders was also witnessed. Tuesday’s data also revealed that household spending also grew by the fastest pace since May. The past week’s data January seems to have been a particularly good month in Japan, especially for retailers. So good that even Prime Minister Koizumi and BoJ Governor Fukui were hawkish, suggesting that individual households are finally also feeling the economic recovery.

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