- The dollar was mostly higher versus other key currencies in light pre-holiday trading on Monday. The greenback rose in tandem with stocks and interest rates on recovery optimism and speculation that the Federal Reserve will normalize rates sooner than earlier thought. This is supported by the Globicus US leading economic index and the leading employment index (see our 12/14 report). The S&P 500 gained 11.58 to 1,114.05. The euro fell for a fifth consecutive day. Sterling declined as closing in on its important 1.60 support. The Australian dollar fell, while the Canadian dollar was boosted by rising Canadian retail sales.
- The USD/JPY rose to its highest level since November 4 after Bank of Japan Governor Masaaki Shirakawa said the central bank will patiently keep its near-zero interest-rate policy. The pair is supported by an improving US/Japanese yield differential. Shirakawa's comment contrasted with Chicago Fed President Charles Evans' comment that Fed officials will give rate increases closer consideration in 3-4 meetings. Japan's deflation problems will keep Japanese rates low for the foreseeable future and return the yen as the preferred carrytrade funding currency again. There are support in the 90-89 area and resistance in the 92.
Financial and Economic News and Comments
US & Canada
- The Chicago Fed national activity index increased to -0.32 in November from an upwardly revised -1.02 in October, indicating overall US economic activity improved last month. The index's 3-month moving average increased to -0.77 from October's upwardly revised -0.87. The level of activity...remained in a range that has historically been consistent with the early stages of a recovery following a recession, the Chicago Fed said.
- Canada's retail sales rose 0.8% m/m in October, the eighth rise in 10 months, to C$35.3 billion ($33.1 billion), after an upwardly revised 1.1% m/m gain in September, Statistics Canada said. Automotive sales advanced 3.0% m/m in October and clothing sales climbed 1.9% m/m. Excluding the automotive sector, retail sales increased as forecast 0.2% m/m in October to C$27.6 billion after a downwardly revised 1.0% m/m gain in September. October retail sales declined 1.4% y/y and fell 1.6 y/y less autos.
- UK GDP will expand 1.2% in 2010 after a 4.5% contraction in 2009, the Confederation of British Industry predicted, raising its 2010 UK growth forecast from a previously estimated 0.9%. The CBI also predicted that the Bank of England will raise the key interest rate from 0.5% in the second quarter to reach 2.0% by the end of the year.
- Japan posted a trade surplus for a 10th consecutive month in November, totaling a higher-than-expected ¥373.9 billion ($4.1 billion), according to figures from the Ministry of Finance. Exports fell 6.2% y/y to ¥4.992 trillion in November, a 14th consecutive year-on-year fall but the smallest since September 2008, following a 23.2% y/y drop in October. Exports grew a seasonally adjusted 4.9% m/m, the largest month-on-month gain since November 2002. Imports fell 16.8% y/y to ¥4.618 trillion in November, a 13th consecutive year-on-year decline but the smallest in 12 months.
- Overall production by all sectors of the Japanese economy rebounded in October, with the all industry activity index increasing 1.2% m/m after a revised 0.7% m/m September decline, data from the Ministry of Economy, Trade and Industry showed.
FX Strategy Update