• The dollar was mostly lower against key currencies on Monday ahead of the Federal Open Market Committee’s interest-rate decision tomorrow. The yen was weak on higher global equity prices. The euro was supported by European Central Bank officials’ hawkish comments. We believe the Fed will certainly cut its benchmark interest rate by 25 basis points tomorrow. The probability for a 50 basis-point cut fell below 50% with the release of the employment report; now it is about 30%.

  • The GBP/USD rallied and sterling rose against other major currencies after UK producer prices jumped the most since 1991. The PPI rise is dampening speculation the Bank of England is beginning an easing cycle after last week’s rate cut. The GBP/USD has recovered some of last week’s decline; however, having not broken its short-term downtrend.

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Financial and Economic News and Comments

US & Canada

  • Pending-home sales unexpectedly rose 0.6% m/m in October following an upwardly revised 1.4% m/m increase in September, the National Association of Realtors said.


  • UK manufacturing-output prices rose a stronger-than-expected 4.5% y/y in November after gaining 3.8% y/y in October, the Office for National Statistics said.

  • UK home prices rose 11.3% y/y in October after a 10.8% y/y increase in September, the Department for Communities and Local Government said.

  • European Central Bank council members Jürgen Stark and Erkki Liikanen said they disagree with their own staff’s forecasts that inflation will slow to below the ECB’s 2% limit in 2009. We in the Governing Council came to a different conclusion….that the risks to price stability are effectively pointing upward. That means there is a risk that inflation rates will remain elevated for some time, Stark said. The staff forecast is more optimistic than my assessment, Liikanen said.

  • ECB executive board member Lorenzo Bini Smaghi said banks’ fears for yearend liquidity squeeze are unjustified, as the ECB and other central banks will continue to ensure stability in money markets. Smaghi said the ECB can’t come to the conclusion that there is a credit crunch in Europe, yet that doesn’t mean there couldn’t be a less favorable evolution going forward.

  • Germany's unadjusted trade surplus widened to a record in October after exports unexpectedly rose. The surplus increased to €18.7 billion ($27 billion) in October from €18.1 billion in September. Exports rose 0.6% m/m and 6.3% y/y. Imports increased 0.2% m/m and 5.2% y/y.


  • China’s State Administration of Foreign Exchange said yesterday it will triple the amount of money overseas institutions can invest in yuan-denominated stocks and bonds to $30 billion.

  • China’s inflation rose 6.5% y/y in October, matching August’s decade high.

  • According to the People’s Bank of China, China’s M2 money-supply growth exceeded the PBC’s annual target for a 10th straight month and rose 18.5% y/y to 40 trillion yuan ($5.4 trillion) in November. The PBC raised its reserve requirement 1.0% to 14.5% for banks.

  • Japanese merchants in November became the most pessimistic they have been in four years. The Economy Watchers index fell for an eighth month to 38.8 in November from 41.5 in October, the Cabinet Office said.

FX Strategy Update