Traders will be focusing on the U.S. ADP Report this morning. The report is expected to show that the pace of jobs loss in the U.S. is slowing, bringing the economy closer to sustaining its current recovery. The early estimate is for a job loss of 150,000 versus a loss of 203,000 in October. A stronger than expected report will lead to an increase in risk appetite which should pressure the Dollar and help to rally stock indices. Later this afternoon, traders will react to the Fed’s Beige Book.
An increase in demand for higher risk assets should send the stock indices higher. Chart watchers should note that the December E-mini S&P 500 is still holding the November top at 1112.25. A break-out over this level should send the index soaring to a possible test of major 50% resistance at 1122.00. A break back under 1102.25 will be the first sign of weakness. A close under 1089.50 will be bearish.
The rise in higher yielding assets pressured the Treasury markets yesterday with the March Treasury Bonds taking the hardest hit. Yields for both March Treasury Bonds and March Treasury Notes rose as these two instruments are being forced to compete with the higher yields investors are getting in the equity markets. The chart indicated that March Bonds would break to at least 121’06. This area was tested overnight. Over the short-run, 120’24 is a possible target by December 7th.
For a second consecutive day, the Japanese Yen is under pressure after a Bank of Japan official expressed his concern about the rise in the currency. Despite official denials, the BoJ seems ready to intervene if the Yen continues to appreciate too much. The Bank of Japan and the Japanese government want to avoid currency volatility. They both feel that that economic growth cannot be sustained if the Yen is fluctuating too much.
Yesterday, following an emergency meeting, the Bank of Japan voted to provide three-months of stimulus in order to avoid deflation. Overnight, Bank of Japan policymaker Shirakawa said he was open to adopting more measures to support the economy. This was a safe way of saying more stimulus was likely. Traders are reacting by selling the Yen.
While the fear of deflation is the main issue, critics believe the three-month stimulus announced yesterday will only provide short-term relief to the economy. This sets the stage for future appreciation in the Yen once the stimulus wears off, and a likely intervention in early 2010. This issue is likely to be addressed when the BoJ holds its regular meeting on December 17th.
This morning, the basket of currencies is trading steady to better. Last week’s low at 74.27 is still holding. A break through this level is likely to trigger a further decline to the April 2008 bottom at 73.67.
The December Euro is trading flat. Traders are being a little hesitant about getting aggressively long at $1.51 ahead of the ADP Report. Support is coming from the news that the Dubai credit crisis is stabilizing and remains a local rather than global issue. Tomorrow’s European Central Bank meeting is also helping to limit speculation. The ECB is expected to leave interest rates unchanged while providing an outline of details on how it will wind down its stimulus packages.
The December British Pound overtook a key retracement level at 1.6646 last night. This price is now support along with 1.6575. A failure to hold these levels will be a sign that a secondary top is forming. The easing of concerns in Dubai is helping to boost demand for the British Pound along with a U.K. construction report which showed that the pace of contraction in this industry has slowed.
The December Swiss Franc is trading in a tight and narrow range overnight with a slight bias to the downside. The Swiss Franc is trading at close to par with the Dollar on the news that the country emerged from its recession. A rapid rise in the Swiss Franc or excessive volatility against the Euro is likely to attract fresh selling by the Swiss National Bank. This action may help the Dollar to rebound.
The Dollar is trading a little better versus the Canadian Dollar overnight on light volume ahead of today’s U.S. employment report. Yesterday, the Canadian Dollar rose on the news that Russia was adding the currency to its Forex reserves. This action coupled with a strong rise in equities and a firm crude oil market helped the currency break through recent tops at .9570 and .9599.
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