* The dollar and yen gained on Friday after US payrolls fell over 500K for a second consecutive month. Greenback’s gain may relate to the relief that although December's job losses were 524K and the total decline was 2.6 million jobs in 2008, some pundits had estimated the job losses significantly higher. The dollar was also supported by increased risk aversion and repatriation flows. The yen rose against all major currencies on the increased risk aversion as US stocks fell and the global recession deepens. Sterling declined against the dollar but rose against the euro for the fifth consecutive day. The Canadian dollar fell after Canada’s unemployment rate increased more than expected to 6.6%, the highest level in almost three years. The Australian dollar fell to its support at the 0.70 handle.

* The EUR/USD plunged on weak EMU economic data and Bundesbank President Axel Weber’s comments that Germany’s economy is contracting faster than forecast. The pair fell over 3.5% on speculation the European Central Bank will cut its main refinancing rate next week to the lowest level since 2005. The pair is at support in the 1.34 area. Resistance exists in the 1.37 area.


Financial and Economic News and Comments

US & Canada

* US non-farm payrolls declined 524,000 in December, meeting consensus expectations, while revisions to October and November subtracted an additional 154,000 jobs, Labor Department data showed. Private payrolls fell 531,000, with declines in almost all key sectors. The weakest job categories were manufacturing (down 149,000), construction (down 101,000) and employment services such as temps (down 81,000). The strongest sector was health and education (up 45,000). The December unemployment rate rose more than expected to 7.2%, the highest since January 1993, following November’s upwardly revised 6.8%. The economy lost 2.6 million jobs in 2008, the most since World War II ended in 1945. Average hourly earnings increased $0.05, or 0.3% m/m, to $18.36 in December, up 3.7% y/y, both slightly higher than expected. Average work week shrank to a record-low 33.3 hours from November’s 33.5 hours. Employers in almost all sectors are likely to continue shedding jobs at an intense rate for the next few months. In short, the grim employment figures point to a miserable 2009 for the US labor market.


*US wholesale inventories declined a less-than-expected 0.6% m/m to a seasonally adjusted $435.01 billion in November, following October’s downwardly revised 1.2% m/m fall, Commerce Department data showed. Wholesale sales plunged 7.1% m/m to a seasonally adjusted $349.25 billion in November after October’s downwardly revised 4.5% m/m drop. Inventories rose 6.3% y/y, while sales fell 7.6% y/y. The amount of goods on hand relative to sales increased in November. The inventory-to-sales ratio climbed to 1.25 from October’s 1.16.


* Canada’s unemployment rate rose more than expected to 6.6% in December, the highest in almost three years amid a recession, from 6.3% in November, Statistics Canada reported. Employers cut a net 34,400 workers in December, also more than expected, after a 70,600 drop in November.

* Canadian housing starts declined 0.4% in December, led by single-family dwellings, to the total of 177,300 units on an annualized basis, compared with November’s upwardly revised 178,000, Canada Mortgage and Housing Corp. said.

* Canadian building permits fell a more-than-expected 12% in November to C$4.8 billion ($4 billion), the lowest level since February 2007, after October’s 16% drop, according to data from Statistics Canada.


* Eurozone retail sales unexpectedly increased 0.6% m/m in November despite deteriorating fundamentals, after October’s downwardly revised 1.0% m/m decline. Retail sales decreased 1.5% y/y, following October’s downwardly revised 2.3% y/y drop.

* Germany’s retail sales increased a more-than-expected 0.7% m/m in November, following October’s downwardly revised 2.2% m/m decline, the Federal Statistical Office reported. Retail sales fell 3.0% y/y in November, against expectations of a flat reading, following October’s upwardly revised 0.8% y/y decline.

* German industrial production continued its decline in November, falling a more-than-expected 3.1% m/m, following October's upwardly revised 1.8% m/m decline, data from the Federal Ministry of Economy and Technology showed. Manufacturing production fell 3.5% m/m in November after falling 2.1% m/m in October. Industrial output contracted 6.4% y/y in November, while manufacturing output dropped 7.0% y/y.

* UK input producer price inflation rose more than expected at a 4.3% y/y rate in December, down from November’s upwardly revised 8.6% y/y, according to the Office for National Statistics (ONS). PPI input contracted 2.0% m/m, following November’s upwardly revised 3.0% m/m decline. PPI output growth came in stronger than expected, reaching a 4.7% y/y rate in December, while PPI output was unchanged m/m. Core PPI output rose 0.2% m/m and 5.0% y/y in December.

* UK industrial production fell a more-than-expected 2.3% m/m in November, following October’s upwardly revised 1.6% m/m decline, according to the ONS. Industrial output declined a more-than-expected 6.9% y/y, following October’s 5.2% y/y drop. Manufacturing production fell a more-than-expected 2.9% m/m in November, following October’s 1.4% m/m decline. Manufacturing output contracted 7.4% y/y in November, also more than expected, after October’s downwardly revised 5.0% y/y drop.


* Japan’s leading index, having declined since June 2008, fell to 81.5 in November from 85.2 in October, preliminary estimates from the Economic and Social Research Institute showed. The coincident index declined to 94.9 from October’s 97.7. The figures were pretty much in line with forecasts.

* Japan’s official reserve assets expanded to US$1030.6 billion in December, the second consecutive increase, from US$1002.9 billion in November, the Ministry of Finance said.

* The Bank of Korea cut its key interest rate 50 basis points to a record low of 2.5%, the fifth cut since early October, amid a looming recession. It’ll be a very bad year, Governor Lee Seong Tae said, adding that the economy almost certainly had a big contraction in Q4 2008.

* China’s house prices in 70 major cities declined 0.4% y/y in December, the first decline since records started in August 2005, following November’s 0.5% y/y increase, the National Development and Reform Commission said.

FX Strategy Update