FOREX ASIA UPDATE - USD

The US dollar weakened onto the 114 handle against the JPY and remained on the defensive against the EUR overnight, with more carry trade unwinding suspected, before an unexpectedly strong non-manufacturing ISM reading saw profit taking demand for the USD quickly emerge.

The non-manufacturing ISM rose to 58.9 in November, beating our expectation of 54.0 and the 55.5 consensus, after 57.1 in October. A breakdown of the data reveals some weakness, however.

The rate markets also saw profit taking after long-end yields were unable to clear their Friday lows. The German Finance Minster said following a meeting with his French counterpart that the recent USD decline was a normal adjustment and should not be dramatized or politicised.

Earlier yesterday, pressure on JPY shorts accelerated on comments late in the Tokyo afternoon from BoJ board member Mizuno that policy could still be tightened despite weaker data. In general, the yen has been gaining ground in recent days despite weak Japanese data and stable Japanese yields, suggesting the recent pick-up in currency market volatility and deterioration in risk appetite have begun to take a toll on stretched carry positions. This is likely to be a repeated theme going forward. A break in the carry trade environment into year-end would add to the dollar's woes, and we expect the recent USD weakness to continue into year-end.

Today, the ADP private payroll estimate for November will be announced. We forecast private payrolls rose 80k in November and total payrolls rose 90k, slightly below their recent trends.