Gold and oil prices are testing the $900 and $90 respectively after the dollar extended its rebound despite the decline in payrolls. While the December payrolls and unemployment rate were both revised favourably, the dollar rebound was partly attributed to sharp losses in sterling and position squaring in the euro. Tonightâ€™s Reserve Bank of Australia interest rate decision (10.30 pm EST) is widely expected to lift rates to a 12-year high of 7.00% from 6.75%. The Aussie is also fuelled by Chinalcoâ€™s $14.5 takeover bid for Rio Tinto, seeking to destabilize BHPâ€™s offer. Both developments are pushing the Aussie to 3-month highs vs the EUR and USD. The Aussie is testing 11-year highs against the British pound whose interest rates are expected to be cut this Thursday to 5.25% from 5.50%. We continue to favour AUDGBP as our top plays of 2008, which is up 3.8% YTD.
Risk appetite is in a tug of war between M&A announcements on one side and the threat of downgrades in the bond insurers on the other. Economic data will take a step back to the central bank decisions from the Australia, UK and ECB, with the latter possibly propping the euro on Thursday via another hawkish press conference. The question now is whether last weekâ€™s 5% rebound in the S&P 500 fits in the definition of a dead cat bounce amid the threat of further corporate warnings and downgrades from the credit rating agencies.
The 10 am EST release of US factor orders is expected up 2.4% in Dec from 1.5%, which would be another positive for US manufacturing following Fridayâ€™s recovery in the ISM above 50.
Aussie Boosted Ahead of Rate Hike
The RBA is expected to raise rates to a 12-year high of 7.00% from 6.75% as part of its campaign to bring inflation below 3.0%, which is well above the preferred 2% target. The Aussie is also fuelled by Chinalcoâ€™s $14.5 takeover bid for Rio Tinto, seeking to destabilize BHPâ€™s offer for the company. Both developments are pushing the Aussie to 3-month highs vs the EUR and USD.
The 7.30 pm EST release of Dec retail sales is expected to show a slowdown to 0.6% from 0.8%, which may draw fresh bids on the retreat ahead of the RBA decision.
AUDUSD has broken the key resistance of 0.9060, eyeing the 0.91 figure. Australian interest rate announcements have moved the currency by as much as 40-50 pips in less than 5 minutes, which means the pair may push towards 0.9140. Another positive day in Asian stocks should further grease the wheels of the Aussie rally and may call up 0.9155. In the unlikely case that the RBA holds rates unchanged, we can see the pair falling to as low as 0.8940.
AUDJPY expected to test the previous low of 97.70, with key resistance looming at 98.20.
The Aussie is testing 11-year highs against the British pound whose interest rates are expected to be cut this Thursday to 5.25% from 5.50%. We continue to favour AUDGBP as our top plays of 2008, which is up 3.8% YTD.
Yen Weakness Nears Support
USDJPY testing the trend line resistance of 107.10, which is also the 61.8% retracement of the move from the Jan25 high to the 105.74 low. With markets propped by M&A announcements and the S&P500 targeting the key 1400 figure, USDJY may sustain fresh momentum towards the 107.30s. We expect continued consolidation to linger within the 106.20-107.40 range. Renewed funding pressures in the LIBOR market may weigh on the pair as the market rate pushes higher. USDJPY support starts as low as at 106.30, backed by 105.80.
EURUSD Seeks to Regain 1.4870
The euroâ€™s failure to sustain its post-payrolls gains is resounding negative for the currency-albeit the downmove was attributed to less fundamental factors. But as we saw in last month, this weekâ€™s ECB press conference may prop the euro anew as JC Trichet emphasizes the inflationary risks. Recall the euro had made significant run-up in last monthâ€™s conference when Trichet reaffirmed the bankâ€™s alertness towards inflation. Wage settlements in Germany continue to preoccupy the inflation hawks in Frankfurt. Tomorrowâ€™s Eurozone releases on PMI services and retail sales should further define the tone for the pair.
EURUSD faces resistance at 1.4840, followed by 1.4870. Another positive reading in US factory orders may drag the pair down to the 1.48 figure, but support seen holding at 1.4770.
Sterling Rebound Seen Fading
Sterlingâ€™s rebound runs fades under $1.98 and is expected to turn into renewed losses towards the 1.97 figure. UK Jan Construction PMI fell to a 16-month low of 53.9 last month from 56 undershooting expectations of 55.0. Although the Shadow MPC of the Times voted 5-4 for a rate cut this week, we expect todayâ€™s decision to be less contested in favor of a rate cut, which we expect to trigger further losses to 1.9660. Upside capped at 1.98