Australian dollar: US$ Bloc Rallies

The US$ index rallied to some of the best levels seen since mid December on Friday - though it remains a matter for debate how much volume would have traded in holiday thinned markets. The improved tone in US equity markets seemed to have been a key driver for the gains. This helped USD/JPY above 92 for the first time since Dec 11. The stronger US$ also weighed on EUR which sank to the 1.3850 area and GBP slid to 1.4400. However, the commodity currencies faired better on the back of improved risk appetite. The AUD saw a strong NY session and opens today around 0.7130, up from a low around 0.6920 in London. USD/CAD also slid to 1.2050 and NZD also held its ground in the face of a stronger US$.

One of the factors that may be helping both the US$ and commodity currencies here is an improvement in the complexion of US data. For all the poor sentiment around about the US economy, the breadth of negative US data surprises has if anything been fading lately. For example, in the last month 45% of all US data releases have beaten expectations according to our calculations, the best showing since early September. A month ago barely 1/3 of all US data releases were beating expectations. History tells us that this improvement in US data versus expectations should give us a lift for the US$ - even if it also helps commodity currencies too.

Economic data and events

US Dec ISM manufacturing softened to 32.4, down from 36.2 in Nov, which was weaker than expected. The detail showed that production declined to just 25.5 (from 31.5) and new orders continued to dry up, falling to 22.7 (from 27.9). This translated to employment dropping to 29.9 (from 34.2), which points to another significant decline in payrolls - which will be released this Friday.

UK data continues to be pressured by restrictive bank lending and falling house prices. December Halifax house price index fell 2.2%mth to be down 16.2%yr, after falling 2.7%mth/14.9%yr in November. And bank lending continues to contract. Mortgage approvals dropped to the lowest since at least 1999 with 27k new loans for house purchases approved in November, down from 31k in October. Banks also reported that they plan to curb lending further with the Bank of England's lending survey revealing that the availability of secured credit to households over the next three months has fallen to -21.2 from -16.8 in the previous month. Housing market activity has virtually come to a halt and today's

data suggests that a quick turnaround is not in sight. The collapse of the UK housing market is a key factor behind the contraction in overall economic activity and a stabilisation is necessary before the economy can recover. Thing are not brighter in manufacturing but there are signs the rate of decline has found a bottom. The December CIPS PMI unexpectedly rose to 34.9 (median 33.9) from 34.4. It remains significantly in the sub 50 contraction zone but the expectations had been for it to fall further below 50 so this improvement suggests the UK contraction may not be intensifying. New orders unexpectedly improved to -35 (median -44) from -38.