- The dollar fell against major currencies on Thursday after Federal Reserve Chairman Ben S. Bernanke indicated the Fed may cut interest rates further amid increasing risk of a US recession. After falling overnight on stronger-than-forecast Japanese GDP which led to a Japanese equity rally and increased risk appetite, the yen later reversed its losses on falling US stocks. The Australian dollar rose on bets the Reserve Bank of Australia will hike interest rates again after strong labor market data.
- The EUR/USD rose to a one-week high after Bernanke’s dovish comment on a possible interest-rate cut. The pair is just below the 1.47-area resistance. If this is broken, the pair may test the important resistance from the triple top and the all-time high in the 1.49 area. There is support in the 1.45 area.
Financial and Economic News and Comments
US & Canada
- Federal Reserve Chairman Ben S. Bernanke indicated that policy makers are prepared to cut interest rates as “the outlook for the economy has worsened in recent months, and the downside risks to growth have increased.” The Fed “will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks,” Bernanke told the Senate Banking Committee. “More-expensive and lessavailable credit seems likely to continue to be a source of restraint on economic growth,” he said.
- US initial jobless claims fell a larger-than-expected 9,000 to 348,000, in the week ended February 9, the Labor Department said. The previous week was revised up to 357,000 from 356,000. However, the four-week average of new claims rose 12,000 to 347,250, the highest level since Hurricane Katrina in October 2005. Continuing claims fell 9,000 to 2,761,000 in the week ended February 2, while the four-week average of those continuing claims rose 3,500 to 2,727,500. Consistent with pre-recession levels, the overall numbers are evidence of a weakening labor market and increasing risk of a recession.
- The US trade deficit narrowed a more-than-forecast 6.9% in December, the biggest decline in more than a year, to $58.8 billion, from $63.1 billion in November, the Commerce Department said. For all of 2007, the deficit shrank 6.2% to $711.6 billion, the biggest decrease since 1991. Exports increased 1.5% m/m to $144.3 billion in December and rose 12% for the year a record $1.622 trillion. Imports fell 1.1% m/m to $203.1 billion in December as the US economy slowed.
- The insurance units of New York-based FGIC were cut six levels to A3 and may be reduced again, Moody’s stated. MBIA and Ambac shares rose after Moody's said they “are better positioned from a capitalization and business franchise perspective” than FGIC. US stocks were pressured after the announcement.
- The Q4 2007 EMU GDP rose a stronger-than-expected 0.4% q/q and 2.3% y/y, Eurostat said. Economic growth is decelerating with weakness in consumption and exports. Country specific GDP showed economic growth in Germany slowed to 0.3% q/q in Q4 from 0.7% q/q in Q3. Economic expansion in France also eased to 0.3% q/q from 0.8% q/q, while economic growth in Spain unexpectedly accelerated.
- European Central Bank council member Guy Quaden said the US economic slowdown will reduce growth in Europe. “I don’t say we have to bury the baseline scenario of December, I say we will have to reassess it….It is clear that the slowdown in the US will be more pronounced than previously foreseen.” Even if Europe is “less dependent on the US than in the past we may not say that we are immune,” Quaden said.
- The median sale price of a US home dropped 5.8% to $206,200 in the last three months of 2007 from $219,000 in the same period of 2006, the National Association of Realtors said. Prices fell in 77 of 150 metropolitan areas, the most since the NAR began tracking values in 1979. The decline was 10% or more in 16 metro areas.
- Japan’s GDP grew at a stronger-than-expected 0.9% q/q in Q4 2007, the Cabinet Office said. Exports rose 2.9% q/q as record exports to Asia offset slower demand from the US. Capital investment rose 2.9% q/q, while private consumption increased 0.2% q/q. The GDP deflator fell 1.3% y/y.
- Australia’s unemployment rate fell to the lowest since 1974 and employment rose for the fifteenth consecutive month, increasing pressure on the Reserve Bank of Australia to hike interest rates again at the next meeting in March. Total employment rose 26,800 in January and the jobless rate fell to 4.1% in January from 4.3 in December, the Bureau of Statistics reported.
FX Strategy Update
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