Australian FOREX Daily Outlook 04/01/2006

MARKET SUMMARY – 04/01/06(03.00GMT)

• The Dollar weakened considerably overnight versus the major currencies on the back of weaker than expected economic data and the FOMC signaling the rate hiking cycle is coming to an end. The US ISM manufacturing index eased from 58.1 to 54.2 in December, well short of forecasts centered on a result near 57.5. US construction spending rose 0.2% in November, short of forecasts centered on a 0.6% rise. The release of the minutes from the Federal Reserves December 13 policy meeting, reaffirmed market suspicions that the end of the Fed rate tightening cycle is approaching. FOMC members “generally anticipated that policy would need to be firmed further going forward” and that “the number of additional firming steps required probably would not be large.” Looking ahead and there is little in the way of data to be released in the States later today with only the weekly mortgage index and factory orders for November. The market expects a healthy rise of 2.3% m/m in factory orders.

• The Euro rose from 1.1862 in the London session and traded to a high of 1.2027 late in the New York session, closing near its highs. Eurozone data was firmer than expected, however this had little impact on the Euro as the move higher was sparked by weak US economic data. Eurozone manufacturing PMI reported at 53.6, up from 52.8 the prior month and above the 53.4 consensus. More dramatically German unemployment fell 110,000 in December, which was better than the 11,500 consensus. Today in the Eurozone sees the release of the HICP flash estimate. The market is looking for 2.2 % yoy from 2.3% previously.

• The Japanese strengthened from 117.88 to 116.05 against the dollar before closing near 116.40 in New York. In the absence of any market activity in Japan, the USDJPY move was solely due to the dollar weakness across the board.

• The Sterling gained against a broadly weaker dollar with a muted reaction to data showing Britain‘s factory sector improved marginally in December. The Sterling surged from a low of US$1.7187 before closing near its highs in New York of US$1.7451. In the UK later today the market will focus on Mortgage approvals. With markets still pricing easing risk in the UK, Sterling shorts could be quite sensitive to upside surprises on the UK data front.

• The Aussie dollar also ended New York trade near its highs of 0.7413, up from 0.7341 in early London. One could argue the Aussie underperformed given the strong rally in base metals and gold.

TECHNICAL COMMENTARY

• Euro – 1.2055

The break above 1.1931 (Dec 28 reaction high) and 1.1954 (61.8% of 1.2062 to 1.1778) resistance areas prompted a sharp rally in the Euro overnight. Resistance is now located at 1.2085 followed by 1.2120. For the downside support is found at 1.1934 (38.2 retracement of the gains from 1.1778 thus far).

• Yen – 115.75

Initial support is located at 115.52 (Dec 19 low) followed by 115.09 (50% retracement of the 108.76 to 121.41 advance). On the flipside the first resistance level is found at 117.34 (61.8% of declines since 118.18) to 117.58 (reaction high from Tuesday).

• Pound – 1.7505

Initial resistance is located at 1.7550 (61.8% retracement of 1.7810 to 1.7129 decline).

There is some room for sterling to rise if it breaks this level with no resistance located until 1.7649 (76.4% retracement of 1.7810 to 1.7129 decline). Short-term support is found at 1.7470 after that there is nothing found until 1.7251 (reaction low from Jan 3^rd).

• Aussie – 0.7420

The recovery in Aussie continues with next target being 0.7447 (61.8% retracement of the 0.7580 to 0.7233 decline) followed by resistance at 0.7498 (76.4% retracement of the same move). Support is located at 0.7315 (Jan 3 low) followed closely by 0.7306 (Dec 30 low).