FOREX ASIA UPDATE - USD

Supportive tone may linger ahead of FOMC The US jobs report was stronger than expected, with payrolls rising 132k in Nov, and the gains in the two prior months were revised up by 42k in total.

The unemployment rate rose only 0.1 percentage point in November versus our forecast of an increase of 0.2%. Fed fund futures contracts showed a sharp pulling back of expectations of a rate cut in the near future, with the market now imply only a 28% (7bps) chance of a cut in March from close to 50% prior to the number, and the curve re-flattened.

This helped the USD markedly on Friday and we are likely to see the supportive tone moving into the Asian session today. But we continue to expect more weakening in the jobs numbers and the USD in the coming months.

Instructively, Friday's data also showed a worse than future expectations component of the University of Michigan survey, signalling slowing in future consumer spending.

We continue to forecast that the Fed will first cut rates at the March 21 FOMC meeting next year, and we still expect rates to fall to 4.25% by the end of 2007.

At the FOMC meeting tomorrow however, we expect the Fed funds rate to remain unchanged at 5.25% with little, if any, change in the post-meeting statement.

It should still signal a continuing tightening bias with risks skewed toward inflation.

The latest batch of economic data has been mixed, but until the jobless rate rises further, the Fed is not apt to change its recent public stance on monetary policy.

Along with the Fed meeting and weekly jobless claims this week, we expect soft retail sales numbers, benign CPI data, and a weaker NY Fed index to encourage markets to price more easing risk for 2007 once again, to the detriment of the USD.

Also of note, Treasury Secretary Paulson and Fed Chair Bernanke visit Beijing, along with other senior administration officials.

Ahead today, the calendar is light just ahead of the FOMC meeting, with the wholesale inventories data for October the only release scheduled.