• The dollar was mostly lower as risk appetite returned on stronger-than-expected US personal spending and higher equity prices on Friday. The trading volume was thin ahead of the holidays. The yen fell, particularly against the high-yielding currencies, on reduced concern that credit losses will weaken global economic growth, encouraging investors to resume carry trades. US equities gained after a report Merrill Lynch & Co. may receive a $5 billion cash infusion helping to rebuild Merrill’s capital base. Sterling found support at 1.98 on better-than-expected UK retail sales. The Canadian dollar rose on stronger-than-expected Canadian retail sales and GDP. The Australian dollar was supported by a renewed interest in carry-trades.
  • The EUR/USD rose today after the 1.43-area support held yesterday. We expect the pair to fall into the yearend supported by diminished Fed policy-easing speculation and increased concern about growth outlook in Europe. Thin market conditions may produce exaggerated price moves, but the seasonal factors usually pressure the pair during this time.


Financial and Economic News and Comments

US & Canada

  • The US personal spending in November rose a stronger-than expected 1.1% m/m and 6.9% y/y, following an upwardly revised 0.4% m/m increase in October, the Commerce Department said. November monthly jump is the highest since May 2004. The strong spending numbers were a promising sign for the economy and will bode well for a stronger-than-expected Q4 GDP in the 2%-3% range. The US personal income in November rose a slightly less-than-expected 0.4% m/m and 6.1% y/y.


  • November US disposable personal income rose 0.3% m/m after increasing 0.2% m/m in October. US personal saving’s rate declined to -0.5% of disposable personal income in November, the first negative number in 15 months. Saving was positive 0.3% in October.
  • The PCE price index rose a stronger-than-expected 0.2% m/m and 3.6% y/y in November following a 3.0% y/y increase in October. The core PCE price index rose 2.2% y/y in November, the highest inflation rate since 2.3% y/y in March 2007. This is problematic for the Federal Reserve as inflation is currently above the comfort zone on the Fed’s favorite indicator. The Fed’s preferred range for this core gauge is considered to be 1.0% to 2.0%. Both strong spending and rising core inflation provide a reason for the Fed to slow the policy easing unless the economy deteriorates.


  • The Fed said it will conduct biweekly emergency auctions of loans as long as necessary as part of a global attempt by central bankers to restore faith in the money markets.
  • University of Michigan’s December consumer sentiment index was upwardly revised to 75.5 but still showed a small -0.8% decline from November. The one-year inflation expectations were downwardly revised to 3.4%.
  • Canadian retail sales rose more than expected in October, the goods sector increased 0.1% and the service sector rose 0.3% in October, Statistics Canada said. Total retail sales increased 7.3% y/y in October. GDP rose a stronger-than-expected 0.2% m/m in October.


  • European Central Bank President Jean-Claude Trichet said the EMU economy faces a number of major uncertainties next year, which will slow economic growth in the euro zone. It is true there are major uncertainties with regard to the economic situation….The council of governors of the ECB feels that there is a greater risk of weaker growth, with it going below around 2%. Trichet said. He also said the ECB’s mandate is price stability.
  • UK retail sales in November rose a stronger-than-expected 0.4% m/m and 4.4% y/y, the Office for National Statistics said. Sales at food stores increased 0.4% m/m, while non-food retail sales fell 0.1% m/m.


  • The People’s Bank of China pledged forceful measures to control liquidity as China tries to prevent record trade surpluses from stoking inflation and investment bubbles. The PBC said it will strengthen guidance to financial institutions to prevent lending from expanding too quickly.

FX Strategy Update