Dollar remains bid ahead of a US housing data

by Saxo Bank Strategy Team

Not much to go by in the European session. but dollar remains strong, but unable to trade through key support in EURUSD at 1.2760 and 1.8830 in GBPUSD

MAJOR HEADLINES – PREVIOUS SESSION

Notes from ths week.

US

Yesterday's FOMC minutes gave USD/Majors not much to go by short term. FOMC showed incoming data was broadly as anticipated. Housing to remain a substantial drag but was not spilling into consumer spending with labor market remained tight. So the take is that, it looks like the FOMC is still a bit more concerned about inflation being to high rather than growth too low. US CPI should be the focus for EURUSD for the remainder of the week. A surprise to the upside meaning 0.3% should lead to break of 1.2765 and a reading of 0.1% should see the pair rally for a test of at least 1.2855.

UK

The retail sales for October is the biggest monthly gain since November 2005. This number is consistent with the MPC's expectation that consumer spending growth will remain firm. But GBPUSD remain vulnerable intra-day as market awaits US CPI which could send the pair a leg lower. We look to sell the pair if it breaks 1.8850 post US figures.

From yesterday:

JPY

Finally some impressive data out of Japan. The economy grew by 0.5% in Q3 compared to 0.2% in Q2. This should set the BOJ on a path of hikes looking ahead into 2007. For comparison the Euro-Zone Q3 GDP release today came out at 0.5%, the same as Japan. So we with an employment reading of 4.2% in Japan and rates at 0.25%, it should be a clear cut case for the BOJ in 2007 to begin to "normalize rates" as long as core CPI and labor costs continue to rebound. Technically we still look for a break of 115.55 in USDJPY and 147.55 in EURJPY to change the technical picture medium term.

NZD

The Kiwi remains under pressure from more then one front. NZDJPY has been "the" carry trade looking back over the past years, but we do not expect this to continue. As the Japanese recovery continues we expect unwinding of theses trade to start being in focus looking towards the end of 2006. Producer Prices input/output disappointed and we do not expect retail sales tonight of out of New Zealand to particular impressive either. Also next week's data event's should bring more selling interest to the NZD as kiwi trade balance and RBNZ cash rate decision should not be supportive. We are short NZDJPY from 78.15 and we look to add to this short if we see a break of 77.40.