Australian FOREX Daily Outlook 14/12/2005

MARKET SUMMARY – 14/12/05(03.00GMT)

• The Dollar failed to move decisively higher or lower against the major currencies in response to the Fed rate decision. In the end the dollar was largely unchanged against major currencies. The US Federal Reserve raised the federal funds rate by 25 basis points to 4.25%. The markets focused on the removal of references to the notion that policy remains accommodative, implying that policy settings are now close to neutral. However, the statement also indicates that “some further measured policy firming is likely to be needed”, implying that we will most likely get another move in January. US sharemarkets responded positively to the interest rate decision, with the Dow up 80pts on the day, with the NASDAQ up 6pts. Other data released showed US retail sales rose by 0.3% in November, short of forecasts of a 0.5% rise. Looking ahead, in the States later today will see the release of the trade balance for October. The trade deficit in September was at a record high, largely due to the US hurricanes. The deficit is expected to improve to –US$62.9 billion in October from US$66.1 billion in September.
  

• The Euro traded in a range of 1.1905 to 1.1984 in both the London and New York session. The market largely ignored German ZEW economic sentiment which was much stronger than expected, as all focus was on the FOMC rate announcement. The ZEW posted at 61.6 up from 38.7 in November and compared to the market consensus of 41.0. The Eurozone recovery appears to be gaining traction. Today’s survey provides further evidence of recovery, in line with other recent confidence surveys.
  

• The Japanese yen ranged between 119.67 and 120.43, before closing the New York session at 119.90.The Bank of Japan’s Tankan survey earlier in the day showed the headline diffusion index for big manufacturers’ sentiment was plus 21, higher than a reading of plus 19 in September but below the market’s median forecast of plus 23. The market’s initial response was to sell yen against the dollar however large profit-taking had USD/JPY trade to a low of 118.48 from an earlier high of 120.20.
  

• The Pound traded in a volatile range of 1.7657 to 1.7778, before closing at 1.7700 in New York. The UK CPI was flat in November taking yoy to 2.1%, but it had little impact on the market. The market expectation was for 0.1% and 2.2% yoy. The picture of a deteriorating inflation environment painted by recent data increases the chances of rate cuts further down the track.
  

• The Aussie traded from 0.7524 to 0.7563, closing in New York near 0.7545. In a speech last night RBA Governor MacFarlane confirmed that the official cash rate was neutral at 5.5%. This indicated that RBA still had a mild tightening bias. Westpac consumer confidence index was down 2.7% today despite lower petrol prices.

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