• The dollar rose against most major currencies on stronger-than-expected consumer price inflation but later pared gains and ended the day little changed after the FOMC minutes of the January 30-31 meeting showed the Federal Reserve was very concerned about the health of the US economy and that the Fed lowered its US growth forecast but raised its inflation forecast. The GBP/USD fell to the lowest level in a month against the dollar after the Bank of England minutes of the February meeting showed the BOE was concerned about UK economic outlook. The yen and Swiss franc fell as US stocks rose increasing risk appetite.
  • Pressured earlier by data on higher-than-expected US inflation and reports that the German Landesbanks were in crisis, the EUR/USD later pared losses on more dovish-than-expected FOMC minutes. The pair is testing the 1.47-area resistance. If this is broken, the pair will probably test its 1.4966 all-time high. There is support in the 1.45-area.

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Financial and Economic News and Comments

US & Canada

  • The consumer price index rose 0.4% m/m and 4.3% y/y in January, the Labor Department said. The core CPI advanced 0.3% m/m and 2.5%. Both are above consensus estimates; thus, making the Fed’s job more difficult. In recession risk management mood, the Fed will not stop further interest-rate cuts. However, in the past three months, the CPI rose at a 6.8% annual rate so the Fed will need to pay attention to inflation soon.
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  • St. Louis Fed President William Poole said excessive cuts in interest rates aimed at averting a recession run the risk of accelerating inflation to an unacceptable level. Poole said there is a tradeoff between recession and inflation. At any given time, policy makers could pursue a powerfully expansionary policy to all but eliminate the possibility of a significant recession in the year ahead, but doing so would come at the cost and even likelihood of an unacceptable increase in the rate of inflation, he said. He thinks the US can avoid a recession and further rate cuts will depend on incoming economic data in the weeks before the next FOMC meeting on March 18.
  • US housing starts increased a modest 0.8% in January to a seasonally adjusted 1.012 million annual rate after plummeting 14.8% in December to 1.004 million, the Commerce Department said. January housing starts dropped 27.9% y/y. January building permits fell 3.0% to a 1.048 million annual rate, the lowest since 984,000 in November 1991. We do not expect any meaningful improvement in the housing market until the end of 2008.
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  • The FOMC minutes of the January 30-31 meeting states that interest rates may need to stay low for some time and the Fed has revised down growth and jobs outlook while raising inflation outlook. Many participants were concerned that the drop in equity prices, coupled with the ongoing decline in house prices, implied reductions in household wealth that would likely damp consumer spending. Some Fed members are anticipating the need to reverse rate cuts when growth prospects improve.

Europe

  • German producer prices rose at a higher-than-expected 3.3% y/y in January, the fastest annual pace in 13 months, compared with 2.5% y/y in December, the Federal Statistics Office said.

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  • The recent increase in euro-area inflation causes intense concern, ECB council member Nicholas Garganas said.
  • The Bank of England minutes revealed an 8-1 vote to cut interest rates by 25 basis points to 5.25%. David Blanchflower voted in favor of a 50 basis-point cut implying that the UK needs aggressive rate cuts to avert a credit crunch and possible recession.

Asia-Pacific

  • Australian wages growth accelerated in line with forecast in Q4. Hourly pay rates excluding bonuses rose 1.1% q/q and 4.2% y/y in Q4 2007 after increasing 1.0% q/q and 4.2% y/y in Q3, the Bureau of Statistics said. Rising wages and the lowest unemployment in more than three decades will reinforce the Reserve Bank of Australia’s view that interest rates need to be raised further to curb the fastest inflation since 1991.

FX Strategy Update