Australian FOREX Daily Outlook 1/12/2005

MARKET SUMMARY – 01/12/05(03.00GMT)

• The Dollar held in tight ranges against major currencies overnight. US sharemarkets eased on Wednesday after investors concluded that the batch of firm economic reports meant that the Federal Reserve would keep lifting interest rates. On the data front, the preliminary estimate of US September quarter GDP was revised up solidly to 4.3% from the advance estimate of 3.8%. The market had expected a smaller revision to 4.0%. The US Chicago PMI also outperformed the market’s expectation. It fell from 62.9 to 61.7 in November, while the market had expected a larger fall to 60.0. A number above 50 indicates expansion. Also the Beige Book report indicated that the US economy continued to expand through mid-November. Looking ahead in the States, the market will focus on the ISM manufacturing index and the PCE core deflator. The market expects a moderate fall in the US manufacturing ISM survey in November. It is expected to post at 58.0, down from 59.1. The market expects the US PCE core deflator to rise by 0.2% in October, bringing the annual rate to 1.9%. The PCE core deflator is a key series watched by the Fed as an indicator of inflation pressures.
  

• The Euro traded between 1.1756 and 1.1800, ending the New York session near the day’s highs. Data in Europe was generally consistent with recovering activity and tighter monetary policy, but was generally in line with consensus. Q3 GDP growth was confirmed at 0.6% which was in line with initial estimates, although the yoy rate was revised slightly higher. November CPI estimate shows further moderation to a 2.4% yoy rate from 2.5% in October. The European Commission’s confidence measures were also released, showing that manufacturing confidence unchanged from improved October levels. Looking ahead, all eyes are on the ECB rate announcement scheduled at 1245GMT, with the market expecting 25 basis point rate hike. President Trichet is schedule to speak 45 minute after the announcement.
  

• The Japanese yen weakened from JPY119.22 per US dollar to JPY119.78, ending the New York session near the lows. Yesterday BOJ deputy Governor Iwata remained more hawkish than the government would like, saying that CPI is likely to turn positive over the November and December readings and that he would prefer to end quantitative easing policy and reduce current account balances. Loose monetary conditions relative to economic conditions is manifesting itself in a weak exchange rate and a strong stock market.
  

• The Pound was the big performer on the day as it rallied from 1.7230 to a high of 1.7347 against the dollar. Sterling firmed against the dollar and euro after a Bank of England policy maker said there was no rush to move UK interest. A Monetary Policy Committee member said that inflation could easily remain above the Bank’s 2 percent target for some months while economic growth appeared to have recovered somewhat. Sterling showed little reaction to weaker than expected UK consumer confidence figures
  

• The Aussie dollar traded between 0.7375 and 0.7405, ending the New York session at 0.7390. In Australia today, the current account deficit widened sharply in the third quarter to $A12.8 billion, against market expectations for a deficit of $12.8 billion. Private Capital expenditure rose 2.9% in the third quarter, topping expectations for a rise of just 1%. The data had little impact on the currency.

TECHNICAL COMMENTARY

• Euro – 1.1790

The Euro has slipped back into the range following Monday’s surge which fizzled ahead of the cluster of resistance around 1.1903 to 1.1915 and ahead of the 12-week trendline resistance that is today located at 1.1924. A break of the trendline would signal a potential medium term base. The underlying trend remains bearish with key support levels located at 1.1683, Nov 28 low and the more important 1.1644 low, Nov 15 which also marks the 2005 low thus far

• Yen – 119.80

While the market stays above 118.20 the overall bull trend remains intact. Fresh gains beyond 119.95 likely to expose 120.76, the reactionary high from July 2003 and 121.89, another reaction high recorded in March 2003

• Pound – 1.7290

Sterling recovery from Monday’s 1.7048 low looks promising however for further upside the market must breach 1.7342 which opens the door for 1.7476. A relapse below 1.7048 would be necessary to undermine the developing positive tone and instead reinstate the broader decline.

• Aussie – 0.7390

A break above Monday’s 0.7456 high expected to yield an extension towards 0.7474, the 61.8% retracement of the 0.7605 to 0.7261 decline, but with scope for 0.7524, the 76.4% retracement thereafter. Weakness below Monday’s 0.7320 low required to undermine the current positive tone.