- The dollar rose against most key currencies on Wednesday. The yen fell on increased risk appetite after the US equity market reversed earlier losses. Tomorrow features Fed Chairman Ben Bernanke’s speech as well as interest rate decisions by the European Central Bank and the Bank of England. We think the ECB will keep rates unchanged at 4.0%, while the BOE is likely to lower rates to 5.25% from 5.50%. Sterling fell against most major currencies and declined to a new record low against the euro on a BOE rate cut speculation. The Australian dollar rose on stronger-than-expected Australian retail sales while the Canadian dollar fell on weak Canadian housing starts.
- The EUR/USD traded modestly lower today. The pair has been unable to break resistance at 1.48 despite weakness in the US economy. The realizations that the economic weakness is spreading to Europe and that the ECB may postpone rate hikes indefinitely have pressured the pair. These factors are improving the relative growth and interest rate differentials in favor of the greenback. Support exists in the 1.45-1.46 area and resistance in the 1.48 area.
Financial and Economic News and Comments
US & Canada
- President Bush will propose a $500 rebate or check to Americans to stimulate spending, WSJ reported. The main options include a $500 tax rebate for individuals to encourage spending and a change in tax laws that would allow companies to deduct a larger portion of investments in equipment.
- Federal Reserve Bank of St. Louis President William Poole said the odds of a US recession have increased and are “high enough to worry about.” “The uncertainties are probably greater” for growth than for inflation, Poole said.
- Canadian new-home starts unexpectedly slowed to an annual rate of 187,500 units in December, from a revised pace of 233,300 units in November, Canada Mortgage and Housing Corp. said.
- The World Bank sees US growth at 1.9% y/y, EMU growth at 2.1% y/y and global growth at 3.3% y/y in 2008.
- EMU GDP growth is expected to slow to 0.5% q/q in Q4 2007 and to 0.4% q/q in Q1 and Q2 2008, according to a joint forecast from Germay's Ifo institute, France's Insee and Italy's Isae institute.
- German industrial production unexpectedly fell 0.9% m/m in November, the Economy Ministry said. Meanwhile, sales abroad, adjusted for working days and seasonal swings, declined 0.5% m/m in November, and German retail sales unexpectedly dropped 1.3% m/m in November, following a 2.3% m/m decline in October, the Federal Statistics Office said.
- UK consumer confidence declined to 85 in December from 86 in November, the lowest in 10 months, Nationwide Building Society said. The gauge of sentiment on the present situation fell 3 points to 88 in December.
- Australia’s retail sales increased a stronger-than-expected 0.8% m/m in November, following a 0.3% rise in October, the Bureau of Statistics said.
FX Strategy Update
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