Australian FOREX Daily Outlook 03/02/2006

MARKET SUMMARY –03FEB06 (05:00GMT)

• The Dollar finished only slightly lower versus the major currencies overnight, with the exception of the Japanese yen. However, heightened sensitivity to risk events was evident in the currency markets overnight when EUR/USD spiked to a high of 1.2108 on the back of renewed terrorism fears. This was in response to comments by US intelligence Chief John Negroponte that Al Qaeda was still planning further attacks against the US. Economic data overnight was favorable to continued speculation on another rate hike by the Fed, with jobless claims remaining low at 295k against consensus of 300k. US unit labor costs rose a greater-than-expected 3.5% in the December quarter the market expected a 2.3% rise. In other markets, stocks were down sharply in the States following concerns that weak US productivity data would spur the Federal Reserve to continue hiking interest rates. Disappointing earnings results from Tyco International added to the fall. The Dow Jones closed 102pts lower and the NASDAQ was down 29pts. Crude oil prices fell overnight, following larger than expected US inventories reported on Wednesday. Crude oil fell by US$1.88 to US$64.68 a barrel. Looking ahead, and non-farm payrolls plus US ISM Non- manufacturing ISM both for January are released later today in the States. Non-farm payrolls, the market is looking for a relatively strong number of 240k. US ISM, the market expects a moderate fall to 59.1 from 61.0 in December. This remains well above 50, so is indicative of continued strong growth in the sector.

• The Euro strengthened from 1.2040 to 1.2108, before closing in New York at 1.2095. The European Central Bank left its policy rate unchanged at 2.25%. There was nothing contained in Trichet’s press conference to alter analysts view that the ECB will deliver a rate hike at its March meeting. Trichet said that the ECB’s vigilance had increased, and that the ECB would continue to do what was necessary to ensure price stability. The market is fully priced for a 25bp hike in both March and June.

• The Japanese yen continued to weaken against the dollar, falling from JPY118.20 per US dollar to JPY118.66 before closing in New York at JPY118.55. Yesterday in Japan, BoJ Deputy Governor Muto disappointed the markets when he said that now was not the time to end quantitative easing. This had the effect of driving USD/JPY higher.

• The Sterling rallied from 1.7713 to a high of 1.7814, before closing near its highs in New York. The Sterling has been supported in recent days by an upbeat manufacturing data and by corporate takeover talks.

• The Aussie dollar rose from 0.7505 to 0.7555, before closing in New York at 0.7530. Today in Australia, retail sales rose 0.4 percent in December, slightly below market forecasts and reinforcing the outlook for steady interest rates. Sales for the fourth quarter as a whole grew a little more than expected at 0.3 percent, though that still points to subdued consumption. Separate government data on Friday showed the country’s trade deficit narrowed sharply to A$1.17 billion ($880 million, well under forecasts, as exports showed a long-awaited surge. Gold rose to a fresh 25-year high overnight to US$576.80 an ounce.

TECHNICAL COMMENTARY

• Euro 1.2090

Initial support at 1.2032 (Feb 2 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 118.40

Initial support is located at 116.69 (Jan 31 reaction low) followed by 116.12 (Jan 27 reaction low). Initial resistance is now at 118.67 (Feb 2 high) followed by 119.52 (76.4% retracement of 121.41 to 113.41).

• Pound – 1.7800

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 – 0.7530

Initial support at 0.7478 (Jan 30 reaction low) followed by 0.7446 (Jan 19 low). Initial resistance at 0.7587 (Jan 18 high) followed by 0.7601 (Oct 27 high).