Daily Report: Dollar Mixed as Markets Driven by Euro Crosses

Movements in Euro crosses continue to drive the currency markets. While dollar retreats mildly after Fed warned of 'distinct possibility of a prolonged contraction' in the US economy, overall outlook of the greenback is mixed. Note that dollar's weakness is mainly seen against Sterling, Aussie and Canadian dollar. Technically speaking, intraday levels in EUR/USD, USD/JPY and USD/CHF are still holding which supports further upside in the greenback. On the other hand, developments in AUD/USD, USD/CAD and to a lesser extent GBP/USD, are supporting further downside in dollar against these currencies. The movements in these pairs are heavily influenced by directions in respective Euro crosses.

The most important development to note today should be in Euro crosses. In particular, EUR/GBP is now pressing 0.9 psychological support (with 50% retracement of 0.8234 to 0.9798 at 0.9016) and decisive break of which will build up the case that 0.9799 is a medium term top and put focus down to trend line support at 0.8741. A break above 0.9304 is needed to indicate fall from 0.9799 has completed or risk will remain on the downside. EUR/AUD recovers mildly but is now very close to an important support level of 1.8481.

Dollar index turns into sideway trading after surging to 84.01. While intraday outlook is turned neutral for the moment, consolidation should be relatively brief as long as 82.55 minor support holds and recent rally should resume to 161.8% projection of 77.69 to 81.62 from 79.63 at 85.99 first. Break will bring retest of 88.46 high. Below 82.55 will put near term trend line support at 81.63 into focus.

The Fed released the minutes for FOMC meeting on Dec 15-16 yesterday. The officials believe the economy will continue to be weak for some time and there's substantial downside risk on economic growth. The minutes reinforced application of various quantitative measures and said that the Fed's balance sheet 'would need to be maintained at a high level' as there is 'distinct possibility of a prolonged contraction'.

New Zealand's trade deficit narrowed to NZD 520M in November, better than consensus of NZD 775 M and the revised NZD996M in October, because growth in imports (+5.2% yoy) dropped more rapidly than exports (+9.4% yoy) due to depreciation in NZD. In nominal terms, imports and exports came in at NZD 4.21B (consensus: NZD 4.54B, October: NZD 4.82B) and NZD 3.69B (consensus: NZD 3.71B, October: NZD 3.83B), respectively.

In Australia, retail sales showed improvement and rose 0.4% mom in November after RBA's rate cuts and decline in commodity prices. The better-than-expected reading (consensus: -0.4%, October: 1%) was brought by increase in food spending which added 0.7% during the month. However, other components such as sales at department stores and spending on clothing dropped.

Looking ahead, Germany will report unemployment level in December which is expected to have increased 10 K, with unemployment rate standing at 7.5%. The Eurozone's PPI in November probably fell 0.7% mom after dropping 0.8% mom in November. December's ADP employment in the US is anticipated to show -450K private job loss. Since November, ADP has published employment data using a new way of calculation which should track more closely the non-farm payroll data (December data to be released Friday).

AUD/USD Daily Outlook

Daily Pivots: (S1) 0.7087; (P) 0.7177; (R1) 0.7322; More

AUD/USD's recent rally resumes by taking out 0.7200 and reaches as high as 0.7265 so far. Further rally is still expected as long as 0.7033 support holds. Rise from 0.6075, which is treated as third leg of consolidation from 0.6008, could extend further to 38.2% retracement of 0.9849 to 0.6008 at 0.7475. Though, upside is expected to be limited there to complete the consolidation. On the downside, below 0.7033 will turn intraday outlook neutral again. Further break of 0.6760 support will be an early alert that such consolidation has completed and will turn short term outlook bearish for a retest of 0.6008 low.

In the bigger picture, whole fall from 0.9849 made a bottom at 0.6008 and turned into sideway consolidation since then. However, note that the impulsive nature of the fall from 0.9849 to 0.6008 indicate that price actions from 0.6008 is developing into correction/consolidation only. The long term down trend is still expected to resume after completing the consolidation. Sustained break of 0.6008 will indicate that the down trend from 0.9849 has resumed for at least another five wave medium term decline, targeting 0.4773 (01 low). But, note that as long as 0.6008 low holds, consolidation from could still extend further. Above 0.7140 will target 38.2% retracement of 0.9849 to 0.6008 at 0.7475 before completing the consolidation.

Forex News Digest

• The Day Ahead U.S. and Canada: ADP Employment, TSY's Paulson to Speak
• The Day Ahead Europe and UK: Euro Zone PPI, German Unemployment
• Asia-Pacific Market Recap: Asian Stocks Gaining, Bonds Mixed
• Australian Retailers Could Suffer in 2009 after Braving the Storm in Late 2008
• Australia Retail Sales Expand Despite Negative Forecasts
• New Zealand's Trade Deficit Better than Forecast, with Imports Down
• FOMC Minutes from Historic Meeting Show Concerns for Interest Rate Band
• Dollar Strengthens After GM Says Government Bailout Should Ensure Survival
• Fed Revives Discussion of Inflation Target to Counter Risk of Price Slide
• Dollar May Rise 9.2 Percent to 102.51 Yen This Quarter, Bank of Tokyo Says
• Citigroup Says Sell Canadian Dollar Against Norwegian Krone, Target 5.20
• Chancellor Darling Warns That U.K. `Far From Through' Recession, FT Says
• Australia Dollar at Three-Month High, N.Z. Currency Gains on Risk Appetite

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