FOREX UPDATE - USD

The USD was able to continue its gains against a beleaguered JPY despite the strong Tankan numbers, but retreated overnight following the weak manufacturing ISM, ignoring the stronger-than-expected pending home sales numbers.
The USD weakened most against the NZD overnight.
If the prospects of rate hikes in Japan did not as yet harm the USD, the prospects of Fed rate cuts may.

The Fed Fund Futures are currently pricing in a 50bp cut in Fed rate through 2007, with the first cut only expected in Q2, but we are expecting more cuts to be priced in as we move into November. With the next round of monthly data, to be released this month, likely to lend more support to the notion that Fed is more likely to ease than to hike again, we could see the USD facing a tougher climb against both the JPY and the EUR at elevated levels.

Of the data to watch are the key non-farm payroll numbers later this week. Like the overnight ISM numbers, the NFP numbers could inflict more pain on the USD.

Fed members are also taking turns on the rostrum this week, with Hoenig speaking on the economy today and chairman Bernanke on Wednesday.

Ahead today, only second-tier data, including the light vehicle sales, weekly store sales and the Challenger layoffs report, are due for release. We expect vehicle sales to recover to 16.5mn from 16.0mn in August but the trend remains negative given the 16.9mn annualised rate seen in the first quarter.