FX Update : USD

The EUR traded between $1.3232 and $1.32658 through the Asian morning and continues to face strong upside potential after closing above key resistance at $1.3220 overnight.

Technicial next key resistance approaches at around 1.3481 level.

EURJPY, having traded in a 153.07 to 153.79 range, faces more upside triggers given the market still wants to sell rallies.

Jobless claims and the Chicago PMI, pointing to a contraction in manufacturing activities for the first time since 2003, helped to push the USD lower. However, core PCE prices (up 0.2%m/m, consensus: 0.1%), and the OFHEO house price index (0.9%q/q, consensus: 0.5%) were slightly stronger than expected. The rise in claims could be a reflection of seasonal adjustment issues around the Thanksgiving holiday, but part of it is likely also a reflection of the emerging change in the trend. We are forecasting a 90k rise in payrolls in the November employment report (due December 8), similar to the 92k in October but down from 134k on average since March and a previous trend of 170-180k. At 4.46%, ten-year notes slipped through 4.5% as Treasury yields fell 5-7bps overnight, probing levels not seen since February.

The market is now rapidly pricing in more Fed rate cuts further out with the Fed Fund futures now giving a 70% probability of three 25bp cuts in Fed rates next year, and fully pricing in the first cut in June. Carry trades including long USD positions are looking more nervous. We continue to expect softening US data to boost Fed easing expectations further in the weeks ahead and look for the environment for carry trades to weaken as exchange rate volatility rises.

Today, we have the manufacturing ISM index for November, which is likely to show further moderation from the 54.0 average in Q3, construction spending, light vehicle sales. Meanwhile, Bernanke, Plosser, Moskow, and Lacker - some of the relatively more hawkish Fed officials of late - are scheduled to speak today. Moskow is the only Fed official specifically scheduled to discuss the economic outlook (0800GMT).