• The dollar traded mixed on Friday after weaker-than-expected US employment data. The yen was boosted by carry-trade unwinding as equity markets plunged. The USD/JPY broke support at 109 as risk aversion increased. The GPB/USD’s support held at 1.97 after a stronger-than-expected UK service sector report. The Australian dollar fell on carry-trade unwinding and the Canadian dollar declined on a weaker-than-expected Canadian manufacturing report.
  • The EUR/USD rose on the weak US employment report but failed to break the 1.48-handle resistance. The pair pared gains after a better-than-expected US service sector report.


Financial and Economic News and Comments

US & Canada

  • US non-farm payrolls increased a less-than-expected 18,000 in December while revisions to October and November added 10,000. Private sector payrolls declined 13,000 in December. The strongest sectors were education and health, professional and business services and leisure/hospitality sector. The weakest were housing and manufacturing sectors. Today’s weak employment report suggests the Federal Reserve will cut interest rates again at the end of January with either 25 or 50 basis-point cut.


  • US non-manufacturing index fell slightly to 53.9 in December from 54.1 in November, signaling continued expansion in the service sector. The new orders component rose while the prices paid component decline; still at a high level signaling rapid price increases. Overall the ISM report on the service sector was slightly better than expected and indicates continuing expansion in the non-manufacturing sector.
  • The US unemployment rate unexpectedly rose to 5.0% in December from 4.7% in November and average hourly earnings increased 0.4% m/m and 3.7% y/y. The unemployment rate is a leading indicator for recessions (lagging indicator at recoveries). The recent increases in the unemployment rate are serious and make the risk of a recession more likely. Today’s report also illustrates the Fed’s dilemma with rising labor cost (and inflation) and weaknesses in the labor market and economy.
  • Canada’s manufacturing PMI fell about 8 points more than expected to 45.9. The drop in the PMI will increase the chance of an early 2008 Bank of Canada interest-rate cut.



  • Royal Bank of Scotland Group Plc’s PMI for euro-region services fell to 53.1 in December, below an initial estimate of 53.2 published on December 17, from 54.1 in November.


  • The Chartered Institute of Purchasing and Supply’s service PMI for the UK service sector unexpectedly rose to 52.4 in December from a 4-year low of 51.9 in November. A gauge of input prices rose to 63.9 from 63.6, matching the highest level in the survey’s history, today’s report showed.


  • The Australian PMI services index gained 0.5 from November to 56.9 in December, the highest in three years, Commonwealth Bank of Australia and Australian Industry Group said.
  • The People’s Bank of China said it will take more steps this year to cool inflation and prevent China’s economy from overheating. A “tighter monetary policy” will “help prevent the economy from overheating and prevent price increases from spreading,” the PBC said.

FX Strategy Update