- The dollar traded mostly lower versus other key currencies on Monday. The yen gained modestly against the dollar and euro. The Australian dollar rose against all major currencies after the Reserve Bank of Australia in its hawkish quarterly report suggested interest rates are likely to go higher as inflation is too high. Earlier pressured by Bank of Canada Governor Mark Carneyâ€™s dovish comments at the G-7 meeting, the Canadian dollar later gained on higher commodity and energy prices. Sterling rose on accelerating UK producer prices.
- The USD/JPY traded lower after the G-7 hinted at a worsening economic outlook for the global economy and more subprime loses increased risk aversion. In addition, the Japanese market was closed for a holiday, which usually dampens demand for high yielding assets from domestic retail accounts. Following the equity market closely, the USD/JPY is in a clearly defined downtrend. There are support in the 105-area and resistance in the 108-area. Recently, the pair has moved sideways. If the resistance is broken, the pair will move higher. If the support is broken, the pair will move lower.
Financial and Economic News and Comments
US & Canada
- President George W. Bushâ€™s administration predicted US economic growth will weaken in the first half of 2008 and accelerate later this year, buoyed by exports and tax rebates. The report said our economy is undergoing a period of uncertainty, and there are heightened risks to our near-term economic growth, but kept unchanged from November its forecast for GDP to expand 2.7% in 2008. The GDP forecast seems optimistic.
- The current turbulence in the worldâ€™s financial markets is both serious and persisting, and the global economy faces an uphill road for some time to come, US Treasury Secretary Henry Paulson told G-7 counterparts.
- Bank of Canada Governor Mark Carney signaled the BOC will lower interest rates.
- Canadian new home prices increased a less-than-expected 0.1% m/m in December after gaining 0.5% m/m in November, Statistics Canada reported. Slowing home prices gives the BOC more flexibility to cut rates. Prices rose 6.2% y/y in December, compared with 6.1% y/y in November.
- UK producer prices rose at their fastest annual rate since the early 90s in January, as the cost of gas and food soared, data from the Office for National Statistics showed. The input price index for the manufacturing industry rose 2.6% m/m and 18.9% y/y in January. Core input prices rose 2.3% m/m and 7.1% y/y, creating a dilemma for the Bank of England.
- European Central Bank President Jean-Claude Trichet repeated that risks to Europeâ€™s expansion have increased, but also warned against betting on ECB rate cuts. Trichet said monetary easing was not on the ECB agenda.
- G-7 finance ministers and central bankers ended a weekend meeting in Tokyo with a statement that downside risks persist, including the US housing slump and tighter credit conditions. German Finance Minister Peer Steinbrueck said banking losses from exposure to US subprime mortgages could reach $400 billion.
- The Reserve Bank of Australia in its quarterly statement said inflation was uncomfortably high, increasing speculation the RBA will raise rates at its meeting next month.
- The G-7 softend slightly the language suggesting that China should allow the yuan appreciation. Though the G-7 noted that due to the rising current account surplus and domestic inflation, apprecation should be accelerated.
FX Strategy Update
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