• The dollar traded mixed on Friday. The yen gained against key currencies as risk aversion returned on renewed worries about the health of financial institutions and lower equity prices. Sterling was modestly lower on weakness in the UK manufacturing sector. The Australian dollar was pressured by carry-trade unwinding while the Canadian dollar fell on unexpected job losses.
  • The USD/JPY fell on lower equity prices and reports that Merrill Lynch will disclose further write-downs related to mortgage losses. The pair is trading in tandem with the equity market. There are important resistance at 110 and key support at 107. The US stock market measured by S&P 500 is at the important 1370-1400 area support. If this is broken, there will be a strong USD/JPY sell-off. If it holds, we expect a USD/JPY rally.


Financial and Economic News and Comments

US & Canada

  • The US trade deficit widened a larger-than-forecast 9.3% m/m to $63.1 billion in November from $57.8 billion in October, the Commerce Department said. The trade deficit widened $4.7 billion versus last year. Oil imports rose strongly and the trade deficit with China declined to $24 billion in November from $25.9 billion in October. Imports increased 3% m/m to $205.4 billion, 11.4% y/y. Petroleum accounted for most of the increase in imports in the past year. Excluding petroleum, imports rose 5.4% y/y. Exports increased 0.4% m/m to $142.3 billion in November, 13.0% y/y.


  • Import prices were unchanged in December after rising 3.3% m/m in November. Import prices rose 10.9% y/y. Export prices increased 0.4% m/m in December, 6.0% y/y. Non-agricultural export prices increased 0.3% in December, 4.5% y/y.
  • The Canadian employment unexpectedly fell 18,700 in December. A gain of 15,000 was expected. The unemployment rate stayed at 5.9%, close to a 33-year low of 5.8% set in October 2007, Statistics Canada said.


  • The UK manufacturing output declined 0.1% m/m in November, compared with a 0.3% m/m increase in October. Overall industrial production fell 0.1% m/m, compared with a 0.5% m/m rise in October, the statistics office said.
  • Germany’s wholesale price index declined 0.5% m/m and rose a less-than-expected 5.1% y/y in December, the Federal Statistical Office said.


  • China trade surplus narrowed to $22.7 billion in December from $26.2 billion in November. Exports grew at the slowest pace in two years, the Chinese Customs Bureau said. Chinese exports rose 21.7% y/y, while imports rose 25.7% y/y. Meanwhile, M2 - China’s broadest measure of money supply - rose 16.7% y/y to 40.3 trillion yuan ($5.55 trillion), the smallest increase in seven months, the People’s Bank of China said.
  • The Economy Watchers index, a survey of Japanese merchants, fell for a ninth month to 36.6 in December from 38.8 in November, the Cabinet Office said. The outlook component declined to 37.0 in December, a 5-year low, from 38.8 in November.

FX Strategy Update