Forex Commentaries

• Consolidating its recent strong gains, the dollar fell on Wednesday as investors took profits before the Christmas holiday. US personal income and spending rose slightly less than expected in November while new home sales unexpectedly decreased 11.3% m/m. The US economic weakness is temporary, not indicating the economic recovery is faltering. The S&P 500 rose 2.57 to 1,120.59. The yen and euro gained for the first time in seven trading days. Sterling declined modestly, pressured by Bank of England minutes that showed BOE policy makers unanimously kept their bond-purchase plan at £200 billion. The Australian dollar was supported by rising commodity prices. Despite slightly lower-than-expected Canadian GDP growth, the Canadian dollar rose for a fourth day, boosted by Canadian Finance Minister Jim Flaherty’s comments that he wouldn’t be surprised if China and Russia bought the Canadian dollar to diversify their currency reserve holdings.


• The dollar index fell from a nearly 3-month high. After breaking its long downtrend, the dollar index surged as investors exited huge short dollar positions. We believe the dollar rally will continue; however, the dollar index, following sharp gains, may require further consolidation before new advances. Today the index found support from the short-term uptrend. There are important supports in the 77 and 76 areas, minor resistances at 78.50 and 79.50 and significant resistance in the 81 area. Thin market conditions over the holidays may exacerbate movements.

Financial and Economic News and Comments

US & Canada

• US personal income rose a slightly less-than-expected 0.4% m/m in November, the largest gain since May, after an upwardly revised 0.3% m/m advance in October, while personal spending grew a less-than-expected 0.5% m/m following October’s downwardly revised 0.6% m/m increase, data from the Commerce Department showed, suggesting the US economic recovery is strengthening. Personal income declined 0.3% y/y in November while personal spending climbed 2.3% y/y. Disposable personal income grew 0.5% m/m in November and rose 3.1% y/y. Wages and salaries grew 0.3% m/m, the biggest increase since April. The overall PCE deflator increased 0.2% m/m in November and rose 1.5% y/y. The core PCE deflator, which excludes food and energy, remained unchanged m/m but rose 1.4% y/y. The savings rate was unchanged at 4.7% in November, compared with a record-low 0.8% in April 2008.

• US new home sales unexpectedly fell 11.3% m/m in November to a seasonally adjusted 355,000 annualized rate, the lowest level since April, after a downwardly revised 1.8% m/m increase to 400,000 in October, according to figures released jointly by the US Census Bureau and the Department of Housing and Urban Development. November new home sales declined 9.0% y/y. Sales were up in the Midwest, down slightly in the Northeast, and down in the South and West. Inventories shrank to 235,000 in November, the lowest level since 1971, from 240,000 in October. That represented a 7.9 months’ supply at the current sales rate, up from October’s 7.2. The median price of new homes sold was $217,400 in November, down 1.9% y/y. The average price of new homes sold was $280,300, down 3.4% y/y.

• The Reuters/University of Michigan final consumer sentiment index increased to a lower-than-expected 72.5 in December (lower than a preliminarily reported 73.4) from 67.4 in November, indicating US consumer confidence climbed for the first time in three months, according to the latest Thomson Reuters/University of Michigan surveys of consumers. The current economic conditions index rose to 78.0 in December (lower than a preliminarily reported 79.1) from 68.8 in November. The consumer expectations index increased to 68.9 (lower than a preliminarily reported 69.7) from November’s 66.5.

• Canada’s GDP increased a slightly less-than-expected 0.2% m/m in October after a 0.4% m/m gain in September, according to GDP data from Statistics Canada. The economy contracted 3.2% y/y in October.

Europe

• Germany’s import prices increased a slightly more-than-expected 0.4% m/m in November, the fourth rise in six months, after growing 0.5% m/m in October, data from the Federal Statistical Office showed. Import prices fell 5.0% y/y, following October’s 8.1% y/y drop. Export prices increased 0.1% m/m in November but declined 1.7% y/y.



• UK service-sector output in the three months to October was down 0.2% after a downwardly revised 0.2% decline in the three months to September, according to data from the Office for National Statistics. October service-sector output fell 3.7% y/y.


• UK mortgage approvals rose more than expected to a 2-year high of 44,713 in November from an upwardly revised 42,552 in October, figures from the British Bankers’ Association showed.

Asia-Pacific

• New Zealand’s GDP was up 0.2% q/q in Q3 2009 after an upwardly revised 0.2% q/q increase in Q2, GDP data from Statistics New Zealand showed, following five quarters of contraction. The Q3 GDP fell 1.3% y/y, following Q2’s 2.1 y/y contraction.

FX Strategy Update