* The dollar declined on Monday as rising stock markets worldwide reduced safe haven flows. The yen fell against all major currencies on carry-trade unwinding, so far unable to make new highs. US existing home sales unexpectedly rose and inventories fell to the lowest level since January 2007. Sentiment towards financial stocks recovered somewhat after last week’s sharp losses, following UK’s Barclays Bank’s upbeat statement saying the bank’s profits would outstrip forecast. The oversold pound recovered from a 23-year low against the greenback on Barclays Bank’s upbeat assessment and UK Prime Minister Gordon Brown’s comments that the government will borrow and invest to weather the economic downturn, but it won’t put fiscal stability at risk. The Canadian dollar rose to its highest level since January 14 after Canada’s government pledged to spend what is necessary to stimulate the contracting economy.
* The EUR/USD rose on better risk appetite and more indications on the European Central Bank’s reluctance to use unconventional methods to ease monetary policy. ECB Governing Council member Yves Mersch said unconventional monetary policy measures are more complicated in Europe than in the US or UK and could unsettle markets. Having declined since December 18, the EUR/USD is testing the resistance from the downtrend in the 1.31-area. A penetration of this downtrend would indicate further gains and a test of the 1.35-area.
Financial and Economic News and Comments
US & Canada
*US existing home sales unexpectedly increased 6.5% m/m to a 4.74 million annual rate in December from November’s downwardly revised 9.4% m/m drop to a 4.45 million annual pace as buyers took advantage of discounted prices in distressed housing markets, the National Association of Realtors said. Existing home sales declined 3.5% y/y. The median price of an existing home fell to $175,400 in December, down 15.3% y/y and the largest year-on-year decline on record. Single-family home prices fell 14.8% y/y, also the largest decline on record. Inventories dropped 11.7% m/m in December to 3.68 million available for sale, the lowest level since January 2007. The months’ supply of existing homes fell to 9.3 in December from 11.2 in November. The months’ supply of single-family homes fell to 8.7 from November’s 10.6. Existing home sales rose 4.0% m/m in the Midwest, 7.4% m/m in the South, and 13.6% m/m in the West, while sales declined 1.4% m/m in the Northeast.
* The Conference Board US leading economic indicators index unexpectedly increased 0.3% m/m in December to 99.5, according to preliminary estimates by the Conference Board, reversing a 0.4% m/m decline in November and a 1.0% m/m decline in October. The largest positive contributors to the December LEI were real money supply, the interest rate spread, manufacturers new orders for consumer goods and materials and manufacturers’ new orders for nondefense capital goods. The most significant negative contributors were building permits and average weekly manufacturing prices. The coincident index was down 0.5% m/m in December to 104.1 driven by contraction in industrial production and employees on nonagricultural payrolls. The lagging index declined 0.4% m/m in December to 113.3. The leading and coincident economic indicators have been dropping for more than a year and the breadth of their deterioration has been widespread, indicating further deterioration in US economic conditions amid an intense recession.
*Taxas manufacturing remained weak in January, with almost all current activity indexes at near record lows, according to the Federal Reserve Bank of Dallas’ Texas Manufacturing Outlook Survey. The general business activity index increased to -50.5 in January from -60.6 in December. Current activity indexes for production, capacity utilization, growth rate of orders, delivery time, volume of new orders and shipments remained at near-record lows. In addition, most indexes for future activity stayed flat, and respondents continued to report bleak six-month expectations, the Dollas Fed said. The prices paid index rose to -44.2 in January from -50.0 in December, while the prices received index declined to -26.0 from -25.0. The employment index declined for a sixth consecutive month in January, falling to -29.8 from December’s -24.8.
* UK mortgage approvals increased to 22,051 in December from November’s downwardly revised 17,339, the British Bankers’ Association reported. However, mortgage approvals dropped 47% y/y and borrowing activity is likely to remain subdued throughout H1 2009 amid worsening UK housing and mortgage markets and a recessionary economy.
* New Zealand’s services industry contracted for a ninth straight month in December, increasing to 48.0 from November’s 47.3, Bank of New Zealand Ltd. and Business New Zealand reported.
* Happy Chinese New Year!
FX Strategy Update