- The dollar rose on Tuesday despite a surprise drop in the US ISM non-manufacturing index to the lowest level since the last 2001 recession. The euro and European currencies were particularly weak. The Australian dollar fell despite the RBA interest-rate increase to an 11-year high of 7.0%. The yen was little changed against the dollar but gained in cross trades on renewed carry-trade unwinding. We sell 1 unit of the USD/JPYand 1 unit of the EUR/USD.
- The EUR/USD dropped after the EMU service sector PMI and retail sales fell more than expected, indicating the US economic slowdown is spreading to Europe. In addition, there are more signs of stress in the European banking system as ECB emergency facility was heavily used again. In this environment, we do not think the ECB can continue its hawkish policy. The EUR/USD has developed a triple top after three unsuccessful attempts to penetrate the 1.49-1.50 area. This could be a significant top and the beginning of a trend reversal for the pair. The chance of a recession in the US is high and should theoretically sink the dollar. However, the record for the dollar is mixed during recessions.
Financial and Economic News and Comments
US & Canada
- The ISM non-manufacturing index plunged to 41.9 in January, the lowest level since the last recession in 2001, from 54.4 in December, the Institute for Supply Management said. This indicates the non-manufacturing sector, which reflects almost 90% of the US economy, is contracting strongly. New orders for nonmanufacturing industries fell sharply to 43.5 from 53.9 and the employment component dropped to 43.9 from 51.8. The measure of prices paid fell modestly to 70.7 from 71.5.
- Europeâ€™s service industries for the eurozone fell more than expected to 50.6 in January from 53.1 in December, Royal Bank of Scotland Group Plc said. The drop is the largest since the 2001 slowdown indicating the EMU services sector is decelerating.
- EMU retail sales fell 1.5% y/y, the biggest drop in 13 years, the European Unionâ€™s statistics office said.
- Federal Reserve Bank of Richmond President Jeffrey Lacker said he sees the possibility of a mild recessionâ€¦.The prominence of downside risks means that further easing ultimately may be warranted.
- Reserve Bank of Australia increased the overnight cash rate target to 7.0%, an 11-year high. A significant slowing in demand from its recent pace is likely to be necessary to reduce inflation over time, Governor Glenn Stevens said. The governor may get more than what he is asking forâ€“a slower economy, as we believe the RBA has tightened too much.
- The Australian PMI index for services declined to 54.9 in January from 56.9 in December, indicating continued expansion at a slower rate. New orders fell to 54.0 in January from 59.9 in December, the Australian Industry Group said.
FX Strategy Update
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