EUR/USD targets 1.3360 all-time high

The euro rose to a record peak against the Japanese yen and gained solidly against the dollar as hunger for rising yields looked to be setting the tone for early 2007. EUR/USD started off on a positive footing, with the market less worried over the impact of the German VAT hike on consumption. Furthermore, ECB members began 2007 on a hawkish tone. Liikanen noted that the outcome of pending German wage talks could add pressure to eurozone prices if pay rises prove to be larger than productivity increases.

In terms of the data calendar, the focus will now shift towards the US ISM manufacturing index (released today) followed by the non farm payrolls report on Friday. For the ISM headline index, the market is expecting a rebound from 49.5 to 50.0 in December, in contrast to economists’ view at BNP Paribas that the survey will point to continued deterioration in manufacturing sentiment. If the survey surprises on the downside, expect further USD weakness. In fact, the FOMC minutes are also released later today and should explain why policymakers were more dovish.

Technical: The fact that the euro started the year at 1.3198, last Friday’s NY close is encouraging and as long as this level holds, we see a minimum move to 1.3305, beyond which the way will be open for a retest of 1.3360, the 2006 high. A clear and closing NY break above 1.3360 will open the way for more gains to 1.3420, a major up-trend resistance line and then 1.3490, another medium term resistance line. Stops on long euros at 1.3200 break.

 

 

USD/CHF needs to break 1.2105

EURCHF logged a 21-month high, as the euro outperformed its neighbour despite the franc’s firmness against the USD and JPY, and other currencies. Rate differentials have been supportive of the EURCHF cross, particularly since the SNB lowered its inflation forecasts for 2006 and 2007 at its policy meeting last month, when SNB’s Hildebrand also downplayed the impact of carry trades on the CHF (suggesting that the central bank is not too concerned about currency weakness). The Swiss manufacturing PMI release

is the next domestic focus, due today. We expect the PMI indicator to stabilise, contrasting with the recent soft KOF indicator. Bear in mind that the KOF tends to be closely correlated with the IFO and the strong rise of the IFO indicator in December argues for a strong KOF reading.

December CPI, on Thursday, is expected to fall 0.2% m/m to remain stable at 0.5% y/y, well below target. While EURCHF is likely to remain well supported, we expect USDCHF to come under moderate selling pressure. The US labour market report on Friday will set the tone for the USD performance for the start of the next week. Due to declining manufacturing and construction employment we expect payrolls to come in weak.

Technical: The USD started the year at 1.2190, the exact close of NY last Friday and is now on target for a minimum move on 1.2105. A clear and preferably NY closing break below 1.2105 will open the downside potential for a move on 1.1980, while a close below 1.1930 is seen opening the way for more USD-weakness for target of 1.1880, then 1.1800 with a chance of a test of 1.1735. Stops on short-USDs at 1.2190.

 

USD/JPY: The dollar is seen consolidating below 119.10, last Friday’s NY close and as long as that level is holding, we see a good chance of the yen rallying to 118.30 as a minimum and then 117.60. A close below 117.60 should trigger a move to 116.10, then 115.40. On the upside, a break above 119.20 will frustrate the shorts, and lead to a test of 119.40-80.

 

 

Sterling set to break higher targeting the 2.00 area

GBP/USD has started the year on a firm footing with a break higher through the initial resistance at the 1.9675 level. We now expect further gains above the 1.9750 area, with a further break above here opening upside potential towards the 1.9845 high seen at the beginning of December and then the 2.00 area in the next few weeks. Indeed, the data from the UK housing market has remained on the positive side, with the Nationwide house price index for December rising to 10.5% y/y from 9.6% y/y in November. The HBOS house price index due this week for December is also likely to confirm the robust picture. The Daily Telegraph/Lombard Street Research Housing Affordability Index is reported to show that house prices are the most overvalued for 15 years. Although the UK PMI Manufacturing survey for December was slightly weaker than expectations, slipping to 51.9 from 52.5 in November (consensus 52.6), pullbacks in GBP/USD will remain limited. The weak USD trend is clearly in tact with yield advantage moving out of favour.

Technical: We expect GBP/USD to break higher through the 1.9750 initial resistance to target the 1.9845 December highs after starting the year at 1.9590, which was last Friday’s NY close and is our stop loss for this week. A break of 1.9845 will be the best news for the sterling bulls, opening the way for a move on 1.9990, a strong up-resistance line to be followed by a move on 2.0055, another medium-term resistance line. Profit taking on longs is advised in the 1.9990 to 2.0055 range.

 

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