* The dollar advanced on safe haven flows on Tuesday on speculation banks must raise more capital as many are insolvent. The yen rose against its rival as Dow fell below 8000 in its worst inauguration drop. The euro fell below the 1.30 support after Standard & Poor’s downgraded Spain’s credit rating and eurozone finance ministers lowered the EMU growth outlook. The Canadian dollar fell as the Bank of Canada slashed its benchmark interest rate and manufacturing orders plunged. The Australian dollar fell on the worsening economic outlook.
* The GBP/USD plunged to the lowest level since July 1, 2001 and the GBP/JPY fell to a record low after the UK government committed tens of billions of dollars more on its financial-rescue plan. The cost of the bailout plan and concerns about the solvency of the entire banking system increased speculations that UK’s credit rating will be downgraded and the government will be left with the bank liabilities. The pair is in a downtrend. There are support from the 2001 low in the 1.37-area and resistance in the 1.45-area.
Financial and Economic News and Comments
US & Canada
* Barack H. Obama took the oath of office on Tuesday as the 44th President of the United States, vowing the era of responsibility, while George W. Bush left office with a 28% approval rating.
* The Bank of Canada slashed its key interest rate 50 basis points to 1.00%, the lowest level since 1934, and signaled that further rate cuts may be needed to counter the Canadian recession. The Bank will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required, the BOC stated.
* Canada’s factory sales declined 6.4% m/m to C$48.4 billion ($38.5 billion) in November, the lowest level since December 2004 and the largest fall since records began in 1992, following October’s upwardly revised 0.2% m/m decline, Statistics Canada said. New orders fell 13.0% y/y.
* Eurozone confidence improved more than expected in January, with the ZEW eurozone economic sentiment index increasing to -30.8 from December’s -46.1, the ZEW Center for European Economic Research said.
* Germany’s investor confidence improved more than expected in January, with the ZEW German economic sentiment index rising to -31.0 from December’s -45.2, its third successive rise, the ZEW Center for European Economic Research reported. However, the current situation index declined to -77.1 in January, the lowest since December 2003, from -64.5 in December.
* UK consumer prices fell 0.4% m/m in December after a 0.1% m/m decline, the Office for National Statistics said. UK inflation decelerated to 3.1% y/y, its lowest level since April, from November’s 4.1% y/y. Core inflation slowed to 1.1% y/y in December, the lowest since August 2006, from 2.0% y/y in November.
* Japan’s consumer confidence continued its fall in December, declining more than expected to 26.7, from November’s 28.7, data from the Cabinet office showed. Excluding one-person households, consumer confidence fell to 26.2 in December from 28.4 in November. The willingness-to-buy measure fell to 29.4.
* The Japanese government lowered its economic assessment in January, noting that the economy is worsening rapidly. Exports and production are falling notably, while the slowdown in the manufacturing sector could lead to severe job cuts, the cabinet office said in its monthly economic report.
FX Strategy Update