- The dollar fell versus its rivals except the yen on Monday as surging US stock prices encouraged investors to move away from safe haven bets in favor of more risk. The Obama administration revealed its long awaited private/public plan to remove banks' toxic assets. The yen fell more than the greenback as risk appetite rose on optimism the plan could revive the US financial system without resorting to outright nationalization of banks. Despite increased risk aversion, the euro and sterling's gains were moderate. Last week all currencies benefited from the risk that the Fed's quantitative easing policy could debase the greenback; this is still a longer-term risk. The dollar may be supported by signs that the US economy will recover before the eurozone and other economies. Our leading economic index indicates that equity prices have bottomed and the US economy will recover in Q3 as we reported on March 9. This weekend's update of the Globicus LEI confirms the predictions. The Canadian dollar rose as crude oil prices advanced to the highest level in almost four months. The Australian dollar gained as risk appetite and commodity prices increased; the aussie is testing significant resistance in the 0.70-area.
- The USD/JPY continued to recover from sharp sell-offs following Wednesday's Fed announcement that it will use its balance sheet to further ease monetary policy. The yen was pressured today by increased risk appetite as risky assets rallied worldwide. The EUR/JPY has already broken important resistance, and the GBP/JPY, AUD/JPY, CAD/JPY and CHF/JPY are at import resistance levels. We believe these levels will be broken and the yen will continue to fall. The USD/JPY is at the 98-handle resistance and the stock market measured by S&P 500 is at resistance in the 820s. Some consolidation is probable.
Financial and Economic News and Comments
US & Canada
- US existing home sales unexpectedly increased 5.1% m/m to an annual rate of 4.72 million in February from 4.49 million in January, the National Association of Realtors reported. Existing home sales declined 4.6% y/y. Existing home sales advanced in all major regions and increased for both single-family units and condos/co-ops. The median price of an existing home increased to $165,400 in February (not seasonally adjusted), but fell 15.5% y/y, the second-largest drop on record. Distressed properties accounted for 45% of all sales. The months' supply of existing homes at the current sales pace was unchanged at 9.7 in February. A faster sales rate was offset by more homes in inventory, the first increase in the number of existing homes for sale since July. Overall, February figures on existing home sales indicate that sales have possibly bottomed already.
- The US Treasury on Monday announced a private/public plan to remove banks' toxic assets. The plan will finance as much as $1 trillion in purchases of illiquid real-estate assets, using $75 billion to $100 billion of the Treasury's remaining financial-rescue funds.
- The Word Trade Organization said global trade will drop 9% in 2009, the largest decline since World War II.
- Canada's leading economic indicators fell for a sixth consecutive month in February, falling a more-than-expected 1.1% m/m, after a downwardly revised 0.9% m/m decline in January, according to Statistics Canada. Nine out of ten sub-components decreased in February, including an 8.0% m/m decline in the housing component, a 7.5% m/m decline in equities and a 4.8% m/m decline in new orders, while M1 money supply increased 1.8% m/m.
- In seasonally adjusted terms, eurozone exports dropped 11.0% m/m in January to €104.55 billion, while imports declined 7.3% to €110.01 billion, Eurostat reported. The trade deficit widened more than expected to €5.5 billion ($7.5 billion) in January, the largest deficit since July 2008, following December's revised €1.7 billion. Exports to the US fell 4.0% in 2008, the most in 5 years. Exports to the UK also fell 4.0%.
- Eurozone construction output increased 1.3% m/m in January after a downwardly revised 2.8% m/m decline in December, Eurostat reported. Construction output fell 9.1% y/y, following December's downwardly revised 13.0% y/y drop.
- Japan's residential land prices declined 3.2% in 2008 to a 24-year low and average commercial land prices fell 4.7% to a 3-year low amid a deepening recession, according to the Ministry of Land, Infrastructure, Transport and Tourism. Overall property prices decreased 3.5%.
- Japanese convenience store sales increased 2.0% y/y in February after a 7.0% y/y gain in January, the Japan Franchise Association said.
FX Strategy Update