Australian FOREX Daily Outlook 01/02/2006

MARKET SUMMARY –01FEB06 (05:00GMT)

• The Dollar weakened against the major currencies overnight prior to the FOMC rate announcement, and was only able to recoup some of its losses after the Fed rate decision. At Dr Greenspan’s final FOMC meeting, the Fed hiked the fed funds rate by 25 basis points to 4.50%, as had been widely expected by the market. The accompanying statement suggesting to markets that policy is now balanced, and that “some further policy firming may be needed” if resource utilisation and energy prices push up inflation. This confirms that further rate hikes will be data dependant. Economic data released overnight was mixed, with US Conference consumer confidence coming in stronger than expected in January. It rose to 106.3 from an upwardly revised 103.8 in December, and compared to the expectation of 105.0. The US Chicago purchasing managers’ index was slightly weaker than expected in January. It posted at 58.5, down from a revised 60.8 in December and compared with the expectation of 59.9. In other markets the Dow Jones closed down 35pts while the NASDAQ finished flat. Crude oil prices eased slightly after OPEC oil ministers agreed to keep output unchanged. Looking ahead and the key data release in the States later today will be US ISM manufacturing. The manufacturing ISM is expected to ease moderately to 55.1 from an upwardly revised 55.6 in December. However, the underlying picture appears to be one of strength, with a moderate upward trend apparent. Most importantly the index remains above the crucial 50 level which is indicative of expansion.

• The Euro had rallied from 1.2086 to 1.2190 prior to the Fed rate decision, but eased back to close at 1.2150 in New York.The Euro benefited initially from the European Commission’s sentiment surveys which showed further improvement in business confidence, with the indicator improving to -4 from -5 previously. Consumer confidence was stable at -11. On the other hand, German December retail sales was disappointing, with sales down 1.4% m/m vs. a +0.6% consensus. German employment worsened in December with unadjusted jobless now over 5 million in January with 12.1% unemployed [seasonally adjusted, only 11.3%].

• The Japanese yen lifted from JPY117.57 per US dollar to JPY116.68, before reversing after the Fed decision to close in New York at JPY117.20 per US dollar. Yesterday in Japan, the jobless rate fell to a lower-than-expected 4.4 percent. The jobless rate fell from 4.6 percent a month earlier and was below a consensus forecast of 4.5 percent. The market now waits for tomorrow’s speech by Deputy Governor Muto of the BoJ, who is normally dovish.

• The Sterling rallied from 1.7690 to 1.7860, before easing back to close at 1.7795 in New York after the Fed announcement. Earlier in the UK, the nationwide house price survey showed prices rising 1.4% m/m in January, better than the +0.5% consensus. Mortgage approvals also jumped 4.4% y/y in the month. Consumer confidence kicked higher, lifting to minus 3 from minus 9.

• The Aussie was one of the top performers overnight as it rallied from 0.7504 to 0.7580 prior to the Fed announcement. After the rate hike the Aussie was quickly sold off to 0.7540 but recovered quickly to close in New York near its session highs. Aussie continues to benefit for strong metal prices. Precious metals continued to soar in European and New York trade, boosted by fund and speculator buying. Gold rallied to a 25-year high of US$577.30, ending the day up US$4.90 an ounce to US$575.50 an ounce.

TECHNICAL COMMENTARY

• Euro 1.2150

Initial support at 1.2040 (Jan 20 low) followed by 1.2007 (Jan 12 low). Initial resistance is now located at 1.2190 (Jan 31 high) followed by 1.2237 (Jan 27 reaction high).

• Yen 117.25

Initial support is located at 116.12 (Jan 27 reaction low) followed by 115.47 (Reaction low from low Jan 26). Initial resistance is now at 117.83 (Jan 30 high) followed by 118.18 (Dec 29 high).

• Pound – 1.7790

Initial support at 1.7626 (76.4% retracement of the 1.7532 – 1.7930 rally) followed by 1.7532 (Jan 19 low). Initial resistance is now at 1.7880 (Reaction high from Jan 27) followed by 1.7930 (Jan 25 high).

• Aussie – 0.7570

Initial support at 0.7478 (Jan 30 reaction low) followed by 0.7366 (61.8% retracement of the 0.7235 to 0.7577 climb). Initial resistance at 0.7587 (Jan 18 high) followed by 0.7601 (Oct 27 high).