Australian FOREX Daily Outlook 16/12/2005

MARKET SUMMARY – 16/12/05(03.00GMT)

• The Dollar was stronger against the major currencies overnight with the exception of the Japanese yen. Data released overnight suggest that core inflation remains tame and manufacturing activity continues to signal strength. Hurricane distortions continued to influence the US CPI in November. The headline CPI fell by 0.6%, more than the expected fall of 0.4%. It was the biggest monthly percentage fall in 56 years. Annual CPI inflation fell to 3.5% from 3.6%. US industrial production rose a robust 0.7% in November, compared to the market’s expectation of a 0.5% rise. Capacity utilization rose to 80.2% from an upwardly revised 79.8%, above the market consensus. US net foreign security purchases were much stronger than expected in October at a record $106.8 billion. The market was looking for US$75.0 billion. The data confirms that the US is comfortably funding its current account deficit. The US Empire manufacturing survey rose strongly to 28.7 in December from 22.3 November and above consensus of 18.2. The index is currently well above average, indicating manufacturing in the New York region is expanding strongly. Looking ahead in the US later today will see the release of the current account balance for Q3. The market expects a widening in the deficit to US$205 billion from US$195 billion in Q2.
  

• The Euro fell from a high of 1.2037 and traded to a low of 1.1937, before closing at 1.1960 in New York. This move occurred after the record net inflow to US assets was announced. Looking ahead the market will focus on the German IFO business survey due out later today. The IFO institute’s business confidence index may have risen to 98.2 from November’s 97.8, according to the median forecasts. This would keep the index close to a five-year high of 98.8 reached in October.
  

• The Japanese yen continued its assault on all major currencies as it continued to strengthen overnight. The Japanese yen rose from JPY117.70 per US dollar to JPY115.84, before closing at 116.40. Japanese officials don’t sound too fussed on the extent of the movement in JPY, with Finance Minister Tanigaki saying that the FX market is line with fundamentals.
  

• The Pound traded down from 1.7754 and registered a low of 1.7624, before closing at 1.7650 in New York. Sterling gained back some losses against the dollar and the Euro after UK retail sales grew by more than expected. November retail sales rose by 0.7 percent, compared to 0.2 percent in October.
  

• The Aussie dollar fell from 0.7563 to a low of 0.7458, before closing at 0.7475 in New York. A fall in commodity prices, unwinding of carry trades, and a break below key technical levels all contributed to Aussies slide.

TECHNICAL COMMENTARY

Euro – 1.1950

The move higher in Euro has confirmed a clear breach of the trendline resistance that was located at 1.1839.This sets the scene for a climb towards 1.2046, the 76.4% retracement of the decline from 1.2170 – 1.1644 while also setting the scene for gains towards 1.2170, the Oct 27 high. Initial support is found at 1.1900 (Nov 28 high), followed by 1.1870.

• Yen – 116.05

The massive slide from 121.41 extended a bit below 115.99 (Oct 19 high). Only a break of this support would bring up the possibility of a broader bear trend taking hold. For now, it would take a move above the 117.70 (reaction high from yesterday) to 117.96 (38.2% retracement of the slide since 121.41 thus far) to mark something more than just a relief rally unfolding.

• Pound – 1.7635

The consolidation of recent gains took on a downward bias through 1.7654 low, but there’s not much momentum to the downside at this time. And only a move below the 1.7493 to 1.7462 congestion zone from late last week would put the rise from 1.7048 (Nov 28 low) on hold. Until then, keep focus on the 1.7901 (Oct 27 reaction high) to 1.7947 (61.8% retracement of the 1.8501 to 1.7052 decline).

• Aussie – 0.7450

The rally from 0.7261 (Nov 14 low) stalled just as it reached the 0.7572 (61.8% of 0.7762 to 0.7264) to 0.7601 (Oct 27 high) resistance band. The pullback from the 0.7580 recent high pushed through initial support at 0.7495 (61.8% of 0.7442 to 0.7580), and the 0.7458 (38.2% of 0.7261-0.7580) to 0.7442 (Dec 7 low). This could possible confirm a departure from this bull channel, targeting 0.7383 (61.8% of 0.7261 to 0.7580). Only a move above 0.7533 (61.8% since 0.7580) would relieve the current downward pressure.