* The dollar reversed its overnight gains in volatile trading Wednesday as risk appetite increased and US stocks rallied. Sterling touched its lowest level since September 1985 after Bank of England Governor Mervyn King said the BOE may soon adopt quantitative easing to fight deflationary pressures, but the pound later reversed its losses on increased risk appetite. The euro also reversed overnight losses against the dollar and yen. The Canadian dollar advanced as crude oil rose the most in three weeks. Despite falling Australian consumer sentiment, the Australian dollar rose after finding support in the 0.65-area. The Swiss franc fell against other major currencies after Swiss National Bank Vice-President Philipp Hildebrand said policy makers are prepared to intervene to prevent franc appreciation.
* The USD/JPY dropped to the lowest since 1995 (a few pips below its December low) in an options related plunge. The pair tested the 87-handle support before paring losses as a US stock rally gained back most of yesterday losses. Several yen crosses also reached new lows before rising on decreased risk aversion as US stocks rallied. Supports exist around the 89 and 87 handles and resistance is in the 92 area.
Financial and Economic News and Comments
US & Canada
* US builder confidence in the market for newly built single-family homes declined further in January, edging down from 9 in December to a new record low of 8 in January, according to the latest National Association of Home Builders/Wells Fargo housing market index.
* US Treasury Secretary-nominee Timothy Geithner told Congress President Barack Obama will propose to Congress within the next few weeks a comprehensive crisis-response plan. The president will come before the Congress in the next few weeks and lay out to the American people a comprehensive plan to help stabilize the core of the financial system so that banks, which are so critical to our economy, are able to provide the credit necessary to get recovery going again, Geithner said.
* Canada’s whole sales fell for a second straight month in November, declining 1.6% m/m to C$44.4 billion ($35.2 billion), following October’s 1.8% m/m decrease, Statistics Canada reported.
* Germany’s producer prices declined a less-than-expected 1.0% m/m in December, following November’s 1.5% m/m fall, data from the Federal Statistical Office showed. The producer-price inflation rate decelerated to 4.3% y/y in December, slightly higher than expected but down from November’s 5.3% y/y.
* The German economy may contract in 2009 by as much as 2.25%, the biggest margin since 1949, and will show the first signs of recovery in H2 2009, according to an annual report by the Economy Ministry.
* UK claimant unemployment climbed for an 11th month in December, rising 77,900 to 1.16 million, the highest level since January 2000, following November’s upwardly revised 83,100 rise, the Office for National Statistics said. The unemployment rate increased to 3.6% in December from 3.3% in November. Wage pressures eased, with average earnings including bonuses increasing 3.1 y/y in the three months through November, following a 3.3% y/y pace in the period through October. Excluding bonuses, wage growth was unchanged at 3.6% y/y. The unemployment total based on International Labor Organization methods jumped 131,000 in the quarter through November to 1.92 million, the highest since September 1997. The ILO unemployment rate rose to 6.1% from the previous period’s 5.7%.
* The UK budget deficit swelled to £14.9 billion ($20.5 billion) in December, the second highest for any month since records started in 1993, doubling from £7.4 billion a year earlier, the Office for National Statistics reported. Tax income declined 5.5% and spending increased 6.0%.
* The Bank of England voted 8-1 in favor of a 50 basis-point rate cut in the bank rate to 1.50%, rejecting David Blanchflower’s proposal for a 100-basis-point cut, the minutes of the January 7-8 BOE Monetary Policy Committee meeting showed. The markets had priced in a cut of 50 basis points and either leaving Bank Rate unchanged this month, or implementing a larger-than-expected cut, could damage confidence further in both financial markets and the real economy. Weighing these arguments together, most members concluded that a cut in Bank Rate of 50 basis points was appropriate, the minutes read.
* Japan’s leading index declined to 81.3 in November and the coincident index fell to 94.9, indicating worsening economic conditions, final November LEI data from the Economic and Social Research Institute showed.
FX Strategy Update