FOREX ASIA UPDATE - USD

After weakening significantly against the JPY and the EUR last week, the USD consolidated overnight ahead of the important non-farm payrolls and various central bank meeting this week and the Fed's own meeting next week, aided further by the strong rally in equities markets.

The S&P500 was up almost 1% while the Nasdaq was up 1.5% on Monday. This performance was despite the weaker than expected pending home sales index which declined 1.7%m/m after -1.1% in September. In this week's limited Fed speeches ahead of the FOMC meeting, Chicago Fed President Moskow, speaking to cnbc.com, continued to characterise the economy as "solid", although he expects sub-trend real GDP growth in 2007 of around 2.8%.

That aside, Moskow reiterated the message from the last FOMC statement when he said "I think we have to be very vigilant about inflation, very careful, and make sure it doesn't stay at elevated levels for too long". The Treasury market moved in a narrow range throughout the day and yields closed within a basis point of Friday's close.

All these spell little excitement as the market cools its heels ahead of some important policy decisions.

The ECB is widely expected to hike this Thursday, the BoC is likely to keep rates unchanged today while the BoE, RBA, RBNZ and the BoC all meet on various days of the week and are expected to keep rates unchanged as well.

In a thinned December market, caution is likely to prevail ahead of these potential trigger events. But if rates go as expected, we think the generalised USD weakness story is only likely to continue as the run of weaker data out of the US weighs.

TODAY, we expect the headline non-manufacturing ISM to reverse some of that surge in November. Q3 productivity growth will probably be revised up somewhat, following the upward revision to GDP. Perhaps more importantly, we expect a sizable downward revision to unit labour costs (ULC) after revisions to wage income. We forecast ULC at 2.9%q/q (annualized) in Q3 (consensus: 3.2%), versus the initial estimate of +3.8%, with a significant downward revision in Q2. We also forecast factory orders to have fallen 6.0% in October (consensus: -4.2%, after 2.1%).

Its Advicable to Lock Some profits in EUR/USD