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FX Insights Ahead of Tankan and CPI

Unexpectedly low jobless claims of 304K from prior 324K are the main booster of the dollar's sharp rally (2 1/2 week highs vs the yen and 8-month highs vs the Canadian dollar). We warned in this morning's note that EURUSD could be vulnerable to 1.3130 from 1.3170s and USDJPY to break above 117.80 in the event of jobless claims below 320K.

Traders' next focal point is this evening's tankan business sentiment survey from Japan, which is expected to not fare sufficiently strong to evoke expectations of a BoJ rate hike next week. The diffusion index of large manufacturers' business conditions is expected to rise to 25 from 24, just 1 point below the high reached in Q3 2004. Also crucial in the report is manufacturers' forecast for the Jan-Mar 2007 tankan as well as their revisions for future capex plans. Should these factors do come on the high end, then we could see a retreat in USDJPY as the recent gains in the pair have increasingly discounted a BoJ rate hold this month.

Friday's US core CPI is expected to revert to the 0.2% level after the 0.1% October reading weighed severely on the dollar last mnonth. But it is also worth noting the second decimal figure of the core CPI; Thus, whether a 0.2% figure is rounded off by a high end figure such as 0.19% or a lower end figure such 0.15% will also be key in determining market reaction. As long as EURUSD remains below 1.3190 in Friday European and Asian trade, it will be expected to drop to the 1.3140 support in the event of a +0.2% core CPI.

Gold relatively stable in midst of dollar rally: One reason why we expect the recent dollar bounce to stabilize is that today's dollar rally was not accompanied by a similarly sharp decline in gold. The metal stabilized around the $627.70-$628.40 range today, further signaling the durability of the $622 support (200 day moving average). Thus, dollar bears can start worry once gold does break below $620 and begins testing the 100 day moving average of $609 per ounce.


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