• Trading mixed in early New York trading Wednesday, the dollar was higher against the euro but lower versus the yen as risk aversion was a major theme. The yen rose against all key currencies as US equity prices declined. The euro and pound fell against the dollar as reports showed the weakening growth and increased chance of interest-rate cuts. The dollar block currencies were little changed.
  • The USD/JPY fell on carry-trade unwinding as US stocks traded lower. The pair is trading in tandem with the equity market. The pair, at the lowest level since May 2005, is currently at key support at 105. There is resistance in the 107-area. Some reports mentioned the Bank of Japan was checking rates, indicating the BOJ is uncomfortable with a rising yen.


Financial and Economic News and Comments

US & Canada

  • Canada’s leading economic index unexpectedly fell 0.1% m/m in December, marking the longest period without a gain since 2001, Statistics Canada reported. Six of 10 components fell in December, while two rose and two were little changed. New factory orders fell 1.0% and retail sales of durable goods excluding furniture and appliances declined 0.7%.


  • European Central Bank President Jean-Claude Trichet said he is committed to fighting inflation even in times of market turmoil. “Particularly in demanding times of significant market correction and turbulences, it is the responsibility of the central bank to solidly anchor inflation expectations to avoid additional volatility,” Trichet told the European Parliament. He said the ECB is data-dependent and suggested that slowing growth may give the ECB more room for maneuver on interest rates as there are “downside” risks to the ECB’s 2% growth outlook. “We’ll see how the real economy develops in the future because it can have an effect on inflation,” he said.
  • The overall purchasing managers index for the euro sector fell to 52.7 in January from 53.3 in December, the slowest rate in nearly 3 years; still indicating expansion but at a slower rate. The manufacturing sector was unchanged in January at 52.6 while the services sector fell to 52.0 in January from 53.1 in December. The services sector expanding at the slowest pace since August, 2003. Yields on June rate futures dropped 16 basis points to 3.72%, fully pricing in a 25 basis-point cut by the ECB by June. We believe it will come earlier.


  • The UK gross domestic product increased a stronger-than-expected 0.6% q/q in Q4 2007, the least since Q3 2006, the government said. The GDP rose 2.9% y/y. The UK service sector expanded 0.7% q/q in Q4 2007 following a 0.8% q/q in Q3. The industrial production increased 0.3% m/m, with no change in manufacturing output, the statistics office said.
  • Bank of England Governor Mervyn King said the UK economy could slow “quite sharply” in the near future and the BOE’s 5.5% bank rate is “probably” restricting economic growth. “In the short run, [tighter credit conditions] will slow economic activity, possibly quite sharply,” King said. “But we start the year from a position in which the bank rate, at 5.5%, is probably bearing down on demand,” he added. BOE policy makers voted 8-1 to keep the interest rate unchanged at 5.5% in January, as inflation concerns led a majority to dismiss David Blanchflower’s call for a rate cut. We believe the BOE will lower the key bank rate at least 25 basis points to 5.25% at the February 7 meeting.


  • Australia’s core inflation accelerated to a 16-year high, adding to pressure on the Reserve Bank of Australia to raise interest rates even though the US cut borrowing costs to avoid a recession. The RBA’s measure of underlying inflation, which excludes the largest price fluctuations, surged 3.8% in Q4 from a year earlier. The headline consumer price index increased 0.9% q/q and 3% on the year, a report in Sydney showed.


FX Strategy Update