In volatile and thin New York trading Friday, the dollar declined and sharply reversed earlier gains after US Senator Christopher Dodd said the nationalization of banks is a possibility. International stocks dropped on the growing realization that there is no quick fix for the ailing global financial system. Commodity prices fell on the deteriorating global economic outlook, but gold prices traded above $1,000 for the first time in nearly a year as investors sought safe haven. The euro surged even though eurozone manufacturing and service sectors unexpectedly contracted at a record pace in February. Sterling fell overnight following Bank of England Deputy Governor John Gieve's comment that the UK is threatened with a decade-long slump, but later rose as the greenback fell on the banking concern. The Canadian and Australian dollars gained against the greenback.

Unable to penetrate the resistance, the USD/JPY fell on nervous international equity markets. The pair broke its 2008 downtrend, made a double bottom at the 87 handle and developed a tentative uptrend. Another positive indication is that the pair is trading above its 13- and 50-day moving averages. The 13-day MA, currently above the 50-day MA, has recently turned positive, while the 50-day MA is trying to turn positive. These indicate the USD/JPY may be in the beginning of a powerful uptrend. Fundamentally, most of the carry trades have been unwound. Furthermore, Japan's economy is in freefall and exports are suffering from falling global demand and the high yen. The correlation with the US stock market has weakened recently; nevertheless, remaining noticeable. If the stock market finds a bottom and improves, that should also be positive for the pair. Dow has fallen to new lows this week, but the stock market measured by S&P 500 and Nasdaq is still above its November low. There are resistance in the 94-area and support from the recent uptrend in the 91-area. We expect the uptrend to continue after some consolidation.


Financial and Economic News and Comments

US & Canada

US consumer prices increased for the first time in six months in January, increasing 0.3% m/m, as forecast, reducing deflation concerns, following a downwardly revised 0.8% m/m decline in December, data from the Labor Department showed. The CPI was unchanged y/y, the lowest rate of change since August 1955 and well below the Fed presuming 2.0% annual inflation rate target. Inflation is unlikely to become a serious problem until the debt deflation problem is solved. Energy prices, which climbed 1.7% m/m, accounted for about half the increase in the January CPI. The second largest contribution to overall inflation came from housing rents. Food and beverage prices increased 0.1% m/m in January. The core CPI, which excluding food and energy, increased 0.2% m/m in January, up 1.7 % y/y. Excluding energy, the CPI increased 0.2% m/m in January and rose 2.2% y/y. Real (inflation-adjusted) average hourly earnings declined 0.1% m/m in January but rose 4.6% y/y.


Canada's consumer prices fell a more-than-expected 0.3% m/m in January, the fourth consecutive decline and longest stretch since 1931, led by falling prices for natural gas and automobiles, following December's 0.7% m/m fall, data from Statistics Canada showed. The consumer-price inflation rate decelerated to 1.1% y/y, the least in two years, from December's 1.2% y/y. Bank of Canada core consumer prices fell a more-than-expected 0.4% m/m in January after falling 0.4% m/m in December. The core inflation rate slowed to 1.9% y/y from December's 2.4% y/y.


The eurozone composite PMI fell to 36.2 in February, indicating eurozone manufacturing and service industries unexpectedly contracted at a record pace, advance estimates by Market Economics showed, following 38.3 in January. The manufacturing PMI dropped to 33.6 in February from 34.4 in January, while the services PMI declined to 38.9 from 42.2, the lowest on record for both indexes. The record-low eurozone PMIs point to a GDP decline in Q1 2009, reinforcing the need for further European Central Bank interest-rate cuts.

Germany's manufacturing and service industries remained at contractionary levels in February, according to advance estimates by Markit Economics, with the manufacturing PMI increasing less than expected to 32.2 for the month from 32.0 in January and the services PMI falling further to 41.6 from 45.2.

UK home repossessions rose 54% y/y in 2008 to 40,000 properties, the highest since 1996, the Council of Mortgage Lenders reported, predicting that the total will reach 75,000 in 2009.


According to the Monthly Report of Recent Economic and Financial Developments February 2009, the Bank of Japan said Japan's economic conditions have deteriorated significantly and are likely to continue deteriorating for the time being, adding that financial conditions remain tight. The BOJ expects a continuing decline in exports due to the global economic slowdown and the yen appreciation, projecting that domestic private demand will likely weaken further and public investment will be sluggish. Regarding inflation, the central bank said the year-on-year consumer-price growth rate has moderated to around 0%; however, expecting the rate to turn negative, mainly due to the declines in the prices of petroleum products and the stabilization of food prices and also to increasing slackness in supply and demand conditions in the overall economy.

Japan's all industry activity index in December was at -2.7% m/m, as forecast, following November's downwardly revised -2.4% m/m, according to the Ministry of Economy, Trade and Industry. The December index was at -6.1% y/y.

FX Strategy Update

Primary TrendNegativeNegativeNegativePositivePositiveNegativeNegative
Secondary TrendNegativeNeutralNegativePositiveNeutralNeutralNeutral
Start PositionN/A91.451.43901.1611N/A0.6601N/A

Hans Nilsson
Capital Market Services, L.L.C.

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