Happy New Year. Markets are likely to struggle for direction ahead of the key US December non-farm payrolls data though the end of the year ended on a softer note for equity markets in the US, whilst Asian stocks were somewhat firmer. The USD has taken a firmer tone at the start of this week but is likely to face renewed pressure into the new-year. The fact that USD/Asian FX has failed to build any momentum on the upside also highlights risks to the USD from current levels.
Ahead of payrolls look for EUR/USD technical support around 1.4177, with strong resistance around 1.4459 whilst USD/JPY will find support at 91.00 and resistance around 94.08. I favour a firmer bias for the USD at the beginning of the week but this may not last too long and would look to take profits on long USD / short risk currency positions into next week.
2010 is set to be a year of two halves for currency markets and whilst the USD is to eventually recover, the rally seen at the end of last year is likely to prove unsustainable, especially now that a lot of short USD positions have been covered. If anything the pull back in various risk currencies provide better levels to take long positions, especially in the AUD and NZD as well as many Asian currencies where renewed appreciation in the months ahead is likely. I particularly like the IDR and KRW, two of last year’s winners.
The US jobs report will provide some evidence of a normalisation in economic conditions, with December likely to have marked the best month in two years for payrolls (Bloomberg consensus forecasts a 1k drop in payrolls). Although hiring is unlikely to pick up quickly and wage pressures are set to remain subdued, the data will mark an encouraging shift in job market conditions following the loss of 7.2 million jobs since the US recession began. The unemployment rate is likely to remain stubbornly high, however.
Ahead of the jobs data markets will be able to garner some clues to the data from the jobs component in today’s release of the December ISM data. The ISM is likely to remain in expansion territory though is unlikely to register much of a gain from last month’s 53.6 reading. The eurozone and UK also release their manufacturing PMIs today and although both will remain above the 50 boom/bust mark, neither are set to register much improvement from November’s reading.
There will also be some attention on central bank thinking this week, with the release of the December 16 meeting FOMC minutes as well as the BoE rate decision to digest. The minutes will likely acknowledge some signs of improvement in the economy but there will be no indication that the Fed is shifting its “extended period” thinking even if the Fed wants to reassure markets that it has an exit strategy in place. The BoE meeting will be a non-event for markets, with more interest on the outcome of the February meeting.