We expect the dollar to have sustained the bulk of its losses since the October 13 high and anticipate the recent medium term recovery to continue into end of the year. Despite further softness in CPI, the growth story in the US economy proves to have been stabilized by strong retail sales, falling jobless claims and strong NY Fed Manufacturing. We cannot ignore the message of the market seen in sluggish gold, yields' ability to remain above 4.50% and the dollar strength.
Our EURUSD forecast for a break below 1.30 next week is highlighted from both daily and weekly charts below (especially weekly chart) with next target expected at 1.3040 (38% retracement & 10-week Trend line support). Potential sources for EURUSD weakness may emerge from strong US housing data (Dec Housing Market Index, Nov Housing Starts, positive Philly Fed). WEEKLY EURUSD chart confirms our expectation that pair has peaked for rest of year, with technicals signalling 1.2970 by end of next week.
We expect USDJPY expected to break above 118.60 early next week now that it has broken 3 month trend line resistance at 117.88. The WEEKLY chart suggests 118.90-119.00 to be attained by end of next week and to break above the 119 level in week of December 25th.
The 10-YR NOTE MAR 2007 chart below shows the price fails to break the 2-week resistance of 108.90 (yields remain above 4.50%) despite weak CPI, partly due to positive industrial production. This helps support USD. Only fresh break ABOVE 109 in T-note (yields under 4.48%) reenergizes USD bears. We do not expect this to happen next week as yields are seen remaining above key 4.50% and price below 108.80.
The weak projections for next quarter's Q1 tankan and the downward GDO revisions are the main culprit for provoking further yen weakness and renewed carry trades into next year. This also explains why the low yielding swiss franc is under fresh pressure despite this week's rate hike by the Swiss National Bank.