* The dollar traded mixed on Thursday. US producer prices fell 1.9% m/m in December and initial jobless claims jumped last week by 54K. The USD/JPY and other yen crosses rose following unsuccessful attempts to penetrate supports; the gains were extended in the afternoon as US stocks reversed earlier losses. Sterling rose modestly for a second day. The Australian dollar advanced after a report showed the Australian employment situation deteriorated less than expected in December, while the Canadian dollar fell on lower oil and gold prices.

* The EUR/USD fell after the European Central Bank cut its key interest rate 50 basis points to 2.00% and ECB President Jean-Claude Trichet signaled the ECB is not done cutting rates. The pair successfully tested the 1.30 support after Trichet admitted EMU economic data have been far bleaker than the ECB had been anticipating and that the outlook is deteriorating. The pair has been trending lower since December 18. A penetration of this downtrend would indicate further gains, while a break of the 1.30-area support would indicate further losses for the EUR/USD.


Financial and Economic News and Comments

US & Canada

*US producer prices declined 1.9% m/m in December, almost matching consensus expectations, following November’s 2.2% m/m drop, Labor Department data showed. The PPI declined 0.9% y/y. The December PPI decline was attributable to energy, which fell 9.3% m/m. Food prices also declined. The core PPI, which excludes food and energy, increased 0.2% m/m in December, up 4.3% y/y, nearly the most in twenty years. Consumer goods prices declined 2.6% m/m in December, down 2.5% y/y. Capital equipment prices increased 0.2% m/m in December, up 4.0% y/y. Intermediate goods prices fell 4.2% m/m in December, down 2.0% y/y. Crude prices dropped 5.3% m/m in December, down 24.8% y/y.


* Initial jobless claims rose 54,000 to 524,000 in the week ending January 10, following the prior week’s revised 470,000, the Labor Department said. The 4-week moving average of new jobless claims declined to 518,500 compared with the prior week’s 526,500. Continuing claims decreased to 4.497 million in the week ending January 3 from 4.612 million, the highest level since 1982.


* Manufacturing in New York improved but remained in contraction for a ninth consecutive month in January, with the Empire manufacturing index increasing more than expected to -22.2 from December’s downwardly revised -27.9, data from the Federal Reserve Bank of New York showed. The index measuring the manufacturing outlook for six months from now was negative for the first time on record, dropping to -4.0 from December’s 18.1. New orders increased to -22.8 in January from -23.5 in December. Shipments fell to -13.1 from December’s -11.3. The prices paid index declined to -18.2 from -7.5. The employment index fell to -26.1 from -23.4.

* Manufacturing in the Philadelphia region improved in January but remained in contraction for the 13th time in the last 14 months, with the Philadelphia Fed manufacturing index increasing more than expected to -24.3 from December’s -36.1, according to the Federal Reserve Bank of Philadelphia. The employment index plunged to -39.0 in January, near its all-time low of -40.0 recorded in April 1975, following -28.6 in December. New orders increased but remained in slowdown at -22.3, following December’s -28.2. Shipments improved to -16.7 from -29.7. The prices paid index fell to -27.0 from -25.5.


* The eurozone inflation rate decelerated to 1.6% y/y in December, the lowest since October 2006 and matching the initial estimate published on January 6, following November’s 2.1% y/y, Eurostat reported.

* Germany’s inflation eased for a fifth consecutive month in December as the final CPI reading decelerated to 1.1% y/y, the lowest level in more than two years, from November’s 1.4% y/y, the Federal Statistical Office said.

* The European Central Bank cut its benchmark interest rate 50 basis points to a record low of 2.00%, as forecast. ECB President Jean-Claude Trichet said latest economic data point to a more significant slowing down than projected in the ECB’s December forecasts, signaling a further rate cut in March to counter the eurozone deepening recession.


* Japan’s machine orders fell a more-than-expected 16.2% m/m in November, following October’s 4.4% m/m decline, data from the Cabinet Office’s Economic and Social Research Institute showed. Machine orders plunged 27.7% y/y. The figures indicate a grim outlook for the Japanese industrial sector.


* Prices for corporate goods in Japan continued to fall in December indicating a further leveling off in inflation levels, with the domestic corporate goods price index (CGPI) declining a less-than-expected 1.2% m/m after November’s 1.9% m/m decline, Bank of Japan data showed. The CGPI increased a more-than-expected 1.1% y/y, still below November’s 2.8% y/y gain.

* Australia’s unemployment rate increased to 4.5%, as forecast, in December, the highest in almost two years amid a looming recession, from 4.4% in November, the Australian Bureau of Statistics said. The total number of people employed fell 1,200, less than expected. Full-time employment dropped 43,900. The participation rate declined to 65.0%, as forecast, in December, from 65.1% in November.

* Foreign direct investment in China fell for a third month in December amid a deepening economic slowdown, declining 5.7% y/y to $5.98 billion, after a 36.5% y/y plunge in November, the Commerce Ministry said.

FX Strategy Update