• The dollar traded mixed on Tuesday after Citigroup reported record losses and US retail sales fell more than expected increasing the risk to the US expansion. The euro fell modestly on weak ZEW sentiment data. The yen rallied against all currencies on increased risk aversion as international equity prices declined. The Australian dollar fell on carry-trade unwinding. The Swiss franc and Canadian dollar were little changed against the greenback.
  • The USD/JPY, trading in tandem with the equity market, fell on lower equity prices and Citigroup record losses. The pair, at the lowest level since 2005, is currently at key support. The US stock market measured by S&P 500 is also at the important 1370-area support. If this is broken, there will be a strong USD/JPY sell-off. If the support holds, we expect a USD/JPY rally.


Financial and Economic News and Comments

US & Canada

  • US retail sales, both including and excluding autos, fell a larger-than-expected 0.4% m/m in December, the Commerce Department said. Expectations were for overall retail sales to be unchanged in December and for sales excluding autos to decline 0.1% m/m. Retail sales rose 4.1% y/y and 5.2% y/y excluding autos. The largest declines were in building materials and gas. Retail sales were weak in December but not at recessionary levels. The numbers indicate real consumption growth between 2.0-2.5% in Q4 2007.


  • US producer prices declined 0.1% m/m in December following a 3.2% m/m surge in November. December’s decline was due to energy prices, which fell 1.9% m/m in December after rising 14.1% m/m in November. Inflation at the wholesale level was 6.3% in 2007, the most since 1981. Core producer prices increased 0.2% m/m in December and prices increased 2.0% in 2007, the Labor Department said.


  • The Federal Reserve is likely to cut interest rates to 3.75% from 4.25% at the end of January. However, a 75 basis-point cut to 3.50% is also possible. Fed funds futures contracts on the Chicago Board of Trade showed 100% chance the Fed will cut its target rate for overnight bank loans to at least 3.75% at its January 30 meeting. The chance of a decrease to 3.50% is around 40%, compared with zero probability a week ago.
  • The US dollar index was slightly higher today after falling to 75.36 yesterday, the lowest since November 29. The index fell to 74.484 on Nov. 23, the weakest since the gauge began in 1973.
  • The NY Fed manufacturing index weakened slightly from 9.8 in December to 9.0 in January, still indicating continued manufacturing expansion in the New York area.
  • The US may already have entered a recession or will do so shortly, former Fed chairman Alan Greenspan told the Wall Street Journal in an interview.


  • UK inflation held above the Bank of England’s 2.0% target for the third month in December. Consumer prices increased 0.5% m/m and 2.1% y/y, the Office for National Statistics said.
  • European Central Bank council member Klaus Liebscher said he sees significant upside risks to inflation.
  • EU’s economic and monetary affairs commissioner Joaquin Alumina said the EUR/USD is close to historical limits and France’s EU affairs minister Jean-Pierre Jouyet said the speed of euro appreciation is a problem.
  • UK producer output prices rose at fastest annual pace since 1991, making it more difficult for the Bank of England to spur growth by cutting interest rates. Manufacturing output prices rose 5.0% y/y and input prices rose 11.2% y/y in December, the Office for National Statistics said. Core producer prices were better behaved as core output prices rose 3.5% y/y and core input prices rose 2.6% y/y in December.


  • The ZEW index of investor and analyst expectations for Germany fell more than expected to -41.6 in January from -37.2 in December, the lowest level in 15 years. The current situation gauge fell to 56.6 in January from 63.5 in December, the lowest since December 2006. Expectations for the EMU area fell to -41.7 and the current situation fell to 47.8 in January.


  • The Bank of Japan lowered its forecast of Japan’s regional economies for the first time after four of its nine branches said conditions in their areas were worsening. The economy as a whole was on a moderate expansion trend, as most regions continued expanding or recovering, albeit with some sluggishness and regional differences, the branch managers said in a quarterly report.

FX Strategy Update