Euro to End 2006 at Another Record High
Euro propelled to new record high of 156.94 against the Japanese yen after strong money supply growth in Eurozone. M3 growth accelerated to 9.3% yoy in Nov, much higher than expectation of 8.5%. Three months moving average rose further to 8.8%, nearly double of ECB’s target of 4.5%. ECB is widely expected to have another 25bps rate hike in first quarter of 2007, probably in March. Strong growth in money supply is supportive to the case that ECB will continue tightening beyond that. No matter whether there will be rate hike in Jan or not, BoJ will still keep the tightening pace slow based on current round of economic data. And rate gap between Euro and Yen will continue to widen.
The Swiss KOF leading indicator continues its fall for the sixth consecutive months and reached 1.6 in Dec. The Swiss economy will likely extend its slowdown into the middle of next year. Also, consider that Nov’s figure was revised up to 1.75 while Dec’s 1.6 was below expectation of 1.62, it appears that the Swiss economy will likely weaken faster than market anticipated.
Elsewhere, dollar was mildly stronger into European session. And as discussed before, recent consolidative rise in dollar against European majors is considered still in force and such consolidation will likely extend to first week of 2007.
USD/JPY
Daily Pivots: (S1) 118.61; (P) 118.81; (R1) 119.11;
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USD/JPY strengthens mildly in early US session. At this point, further rise is expected to follow towards 119.21 high. Break will indicate recent rise has resumed for next upside target of 119.86 high. Below 118.71 will indicate USD/JPY is still bounded in sideway trading and should bring retreat to 4 hours 55 EMA (now at 118.27). Also, even though bearish divergence conditions are being displayed in 4 hours MACD, and RSI, suggesting a short term top is around the corner, if not formed yet, this could only be confirmed by a firm break below 118.14 support. Otherwise, further rally is still in favor.
Break of 118.14 will indicate correction has started and should bring decline to 117.42 cluster support (38.2% retracement of 114.41 to 119.21 at 117.38) or lower. But downside should be contained by 116.63 support and bring further rise.
In the bigger picture, whole decline from 119.86 have completed at 114.41 already. The three wave structure of the fall from 119.86 to 114.41 suggests that it’s merely a correction to the rally from 108.99. Also, such correction is still contained well above 113.14/39 cluster support (61.87% retracement of 108.99 to 119.86 at 113.14). Therefore, favor is shifted to the case that medium term rally from 108.99 is indeed, still in progress and break of 119.86 should bring a retest of 121.38 resistance (05 high). On the downside, sustained break below 116.63 support will argue that the rally from 114.41 has completed and shift focus back to 114.41 low and 113.14/39 cluster support.
In the long term picture, fall from 121.38 to 108.99, with its three wave nature, should either represent the correction to whole year long up trend from 101.65 to 121.38, or part of such correction. With rise from 108.99 still in progress, favor is in the former case. Also, note that the current rally has pushed USD/JPY above multi-year falling trend line (147.68 to 135.20, now at 117.71) again. Sustained break of 121.38 resistance will confirm that whole up trend from 101.65 has resumed.
Read full report (EUR/USD, GBP/USD, USD/CHF, USD/JPY) here.
Shing-Ip Tsui is the founder and CEO of
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