Daily Forex Report - USD rebounds, jobless claims at lowest level since 2008

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• USD: Mixed, jobless claims fall more than expected, continuing claims dropped by 57k, bond yields jump
• JPY: Lower, fiscal worries and widening yield gap, unexpected decline in US jobless claims
• EUR: Lower, IMF says EUR reserve holdings rose in Q3, gains limited by US jobs data, rising bond yields
• GBP: Higher, UK house prices rise at fastest pace in two years, a sign recession is ending
• CAD and AUD: AUD & CAD higher, Australia’s private sector credit growth slows, copper at 16 month high

Overview  
USD traded mixed to lower on the last trading day of the year pressured by an IMF report which says that the US share of world reserves dropped to its lowest level in a decade during the third quarter of 2009. USD was also pressured by liquidation sales as investors close out long USD positions before year-end. GBP traded higher in reaction to report that UK house prices rose the most in two years and UK lenders expect credit conditions to continue to improve in Q1 2010. Commodity currencies traded higher supported by firmer equities and higher price of gold. Copper traded at a 16 month high. AUD traded higher despite report that private credit grew at its slowest pace in almost 2 decades. The Australian private sector credit report may dampen RBA rate hike speculation. US jobless claims fell sharply last week. The jobless claim drop fuels optimism about US growth in Q1 2010. Focus turns to next week’s release of US December unemployment. The trade will be looking at the unemployment report for confirmation that the US labor market is improving. Market consensus is that the unemployment rate will come in at 10.1% with nonfarm payrolls at -23k. Some economists however say that the US nonfarm payrolls may have turned positive in December. If the nonfarm payrolls turn positive the report will likely fuel speculation that the Fed raises rates sooner than forecast. Fed policy outlook will be a key market driver in 2010.

Today’s US data:
Jobless claims for week ending 12/26 declined by 22k to 432k, a reading of 457k was expected.

Upcoming US data:
On January 4th November construction spending and December ISM Index will be released. Construction spending is expected to fall by 0.4% and the ISM index is expected to improve to 54 and 53.6 last month. On January 5th November factory orders, pending home sales and December auto sales will be released. Factory orders are expected at 0.5% compared to 6% last month. Pending home sales index is expected at 111.8 compared to 114.1 last month. On January 6th December ADP employment and ISM Manufacturing Index will be released. The ADP employment report is expected at -70k compared to -169k last month. The nonmanufacturing ISM index is expected at 50 compared to 48.7 last month. On January 7th initial jobless claims for the week ending 01/02 will be released expected at 545k compared to 432k last week. On January 8th December nonfarm payrolls and unemployment will be released. Nonfarm payrolls are expected to come in at -23k compared to -11k last month. The unemployment rate is expected to rise 0.1% to 10.1%. November consumer credit will also be released on January 8th expected at -4.40bln compared to -3.51bln last month.

JPY
Markets were closed in Japan for holiday. JPY traded lower in thin trade Thursday. JPY is consolidating at three month low versus the USD.JPY has been pressured by worries about Japan’s sovereign debt rating and widening of US/Japan bond yield gap. S&P warns that Japan’s sovereign debt rating may be cut if steps aren’t taken to cut Japan’s rising debt. Monday, Japan announced a record ¥92.3trln budget for fiscal 2010/ 11. For the first time since World War II Japan’s bond issuance will exceed tax revenue. US/Japan ten year bond yield spread is at its widest level in two years. Speculation that the BOJ may expand quantitative ease in early 2010 is a major risk for the JPY. The BOJ expanded its funding operations and pledged in mid-December two combat deflationary pressures in Japan. JPY gains were limited by selling in cross trade. GBP/JPY traded 1% higher with GBP supported by report that UK house prices rose the best level in two years. JPY traded lower after the release of better than expected US jobless claims report tracking higher US bond yields.

On January 8th November preliminary leading indicators will be released expected at 2.2% compared to 2.5% last month.

Key technical levels to watch in USD/JPY include support at 91.92 the December 30th low with resistance at 93.30 the September 7th high.

EUR
EUR opened higher supported by improving risk appetite as global equity markets rally and in reaction to a statement from the IMF that  holdings of EUR reserves rose in the third quarter and USD reserve holdings sank to the lowest level in ten years. French Finance Minister Lagarde said she expects French Q4 growth to be good as or better than Q3. According to a Bloomberg report EUR was also supported by short covering ahead of year end as some speculators see this month’s 5% drop in the EUR as overdone. EUR gains were limited by report that US weekly jobless claims declined to the lowest level since July 19, 2008. The decline in jobless claims fuels speculation that the US labor market is improving. Improvement in the US labor market may intensify speculation that US interest rates are headed higher in 2010. EUR remains vulnerable to concern about EU sovereign debt risk and Fed rate hike speculation.

On January 4th EU January Sentix Index will be released expected -5 compared -5.5 last month along with EU December manufacturing PMI. The manufacturing PMI is expected at 51.6 compared to 51.2 last month. On January 5th German December unemployment and CPI will be released. The German Unemployment rate is expected unchanged at 8.1%. CPI is expected at 1% compared 0.5% last month. On January 6th EU services PMI and December will be released expected 53.7 compared to 53 last month along with EU industrial new orders expected at 1% compared to 1.5% last month and November PPI expected unchanged at 0.2%. On January 7th EU December economic sentiment will be released along with November retail sales. Economic sentiment index is expected at 90 compared to 88.8 last month. Retail sales are expected to rise by 0.1% compared 0.0% last month.

The technical outlook for the EUR is mixed as the EUR traded above 1.4400. Expect EUR support at 1.4306 the December 30h low with resistance at 1.4503 the December 15th high.

GBP
GBP traded higher supported by improving risk sentiment and report that UK house prices rose at their fastest pace in two years. UK December nationwide house prices rose by 0.4% and 5.9% for the year. The rise in UK house prices fuels speculation that UK recovery is gaining momentum. The house price report may reduce pressure on the BOE to expand quantitative ease in early 2010.GBP is also supported by a report that UK lenders expect credit conditions to continue to improve in Q1 2010. GBP experienced remarkable price action rallying more than four cents from Wednesday’s lows. Much of the rally in the GBP appears to be unwind of short positions with price movements exaggerated by thin year end conditions. GBP remains vulnerable to concern about UK debt outlook and election uncertainty The UK will hold a general election sometime after March of 2010 and before June 3rd. There is growing concern that the UK election may result in a hung parliament with no political party gaining in the UK Parliament may make it difficult for the UK to take action to reduce its debt. Tuesday a group of economists criticized the UK government’s irresponsible failure to come up with a convincing plan to reduce the UK budget deficit. If the UK government fails to take credible action to reduce the budget deficit the UK is at risk of losing its AAA sovereign debt rating. UK budget outlook will be a key campaign issue and election uncertainty may encourage selling pressure to the GBP.

On January 4th November consumer credit will be released expected at -0.4bln compared to -0.579bln last month. November mortgage applications and lending will also be released on January 4th. Mortgage applications are expected at 58k and lending expected at 0.9bln. December manufacturing PMI is also due for release on January 4th expected at 52 compared to 51.8 last month. On January 6th December services PMI will be released expected unchanged at 56.6.

The technical outlook for GBP is mixed to positive as GBP rallies above 1.6100. Expect near-term support at 1.6005 with resistance at 1.6340 the December 17th high.

CAD
CAD traded higher supported by firmer equity market trade, stronger metals prices and improving US labor data. Equity markets traded higher in Asia, Europe and the US. The equity market rally fuels demand for growth based currencies like the CAD. Metals markets are strong with copper prices trading at their highest level in 16 months and $10 higher. CAD has been benefiting from speculation that improvement in the North American economy is gaining momentum. Today’s unexpected drop in US jobless claims generates optimism about economic recovery in North America. There were no major Canadian economic reports released in today’s trade. CAD has outperformed with support from improving growth outlook in North America and less dovish BOC policy bias.  At the BOC policy meeting in December the BOC reaffirmed its pledge to leave interest rates at record lows through June 2010 as long as inflation remains in check. Last week BOC Governor Carney said that the BOC’s pledge to keep rates low until mid to 2010 is conditional and the BOC has flexibility to shorten the time frame for the rate commitment. Carney’s comments appear to open the door for an earlier BOC rate hike if inflationary pressures continue to mount. CAD gains were limited by report that Canada’s PM Harper closed Parliament for two months. Political turmoil in Canada may limit demand for the CAD.

On January 5th November I PPI and RMPI will be released. These reports will give some indication of whether Canada is experiencing inflationary pressures.

The technical outlook for CAD is mixed as USD/CAD trades above 1.0500. Look for near-term support at 1.0425 the December 30th low with resistance at 1.0580 the December 23rd high and 1.0640.

AUD
AUD traded higher despite report that Australia’s private sector credit rose by just 0.1% in November. Australia’s private sector credit growth is at its slowest pace in 17 years. Weaker private sector credit growth may slow the Australian recovery and dampen RBA rate hike speculation. Today’s AUD rally is attributed to firmer metals prices as copper trades at 16 month high and improving risk appetite as globalized markets rally with the Hang Seng index closing 1.5% higher. AUD had been experiencing significant selling pressure sparked by diminished RBA rate hike speculation and concern that recent RBA rate hikes have contributed to weaker than expected domestic growth in Australia. At the start of December investors were looking for the RBA to hike rates by 50 bps in February. The trade now is looking for the RBA to pause in its tightening cycle because the sustainability of the economic recovery in Australia is less certain. Today’s Australian private sector credit report will further reduce the odds of a February RBA rate hike.

On January 6th November building approvals would be released expected at 1.5% compared to -0.6% last month. On January 7th November retail sales and November trade balance will be released. Retail sales are expected to rise by 0.6% compared to 0.3% last month. The trade balance is expected at -2.5bln compared to -2.3bln last month.

The technical outlook for the AUD is positive as the AUD trades above 9000. Expect AUD support at 8902 the December 30th low with resistance at 9070 the December 16th high.