Australian FOREX Daily Outlook 05/01/2006

MARKET SUMMARY – 05/01/06(03.00GMT)

• The Dollar continued to weaken against the major currencies overnight. The market continues to focus on the hopes that the Federal Reserve is nearing a pause in its rate-hiking cycle. The market paid little attention to economic data released in the States overnight. Mortgage applications declined by 3.4% to the lowest levels since February 2005. This is further evidence of slowing in the US housing market and is perhaps the contributing factor to why yields are lower. US sharemarkets rose for a second day on expectations of the end of the rate – hiking cycle. In the US later today will see the release of weekly jobless claims and ISM non-manufacturing for December. The market expects ISM non-manufacturing to improve to a reading of 59.0 versus 58.5 in November.

• The Euro rose from 1.2033 in the London session and traded to a high of 1.2142 late in the New York session, and closed near its highs. The Euro rise was due mainly to dollar weakness across the board as Eurozone data came out in line with market expectations. The December Eurozone CPI flash estimate met expectations for a 2.2% reading, down from 2.3% in November. Despite this and Tuesday’s strong PMI and German jobs data, Euribor implied yields have continued to decline which suggests the market remains cautious about pricing in too much ECB tightening at this stage. Later today in the Europe will see the release of the Eurozone retail sales and preliminary German factory orders.

• The Japanese yen bucked the trend and eased against the dollar overnight from 115.63 to 116.43 per US dollar, before closing in New York at 116.00.

• The Sterling gained against a broadly weaker dollar and kept steady against the Euro.Sterling traded up from 1.7463 to reach a high of 1.7617 before closing at 1.7600 in New York. Data in the UK was mixed, with mortgage lending for November exceeding expectations but net consumer credit coming in softer than expected.

• The Aussie dollar rose from 0.7403 to 0.7483, before closing the New York session around 0.7470. Aussie continues to benefit from the weaker dollar and stronger base metals.

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