Forex Commentaries

• Consolidating its recent strong gains, the dollar traded modestly lower in light Monday trading. US holiday retail sales grew 3.6% y/y, SpendingPulse said. The S&P 500 rose 1.30 to 1,127.78, struggling to penetrate the important 1130 resistance. The yen declined modestly on mixed Japanese economic data. Deflation in Japan remains a serious concern with year-on-year declines in retail sales and labor cash earnings, while Japanese industrial production was better than expected. Sterling rose for the first day in seven. The Australian dollar was supported by higher commodity prices and China’s strong economic outlook. The USD/CAD fell for the fifth day in six, pressured by rising crude oil prices; the pair is just above important support at 1.04.


• The EUR/USD rose for a third day as it is working off its short-term oversold condition developed after sharp drops following the penetration of the EUR/USD long-term trend and 50-day moving average on December 7. The EMU yield advantage against the US has narrowed significantly in December, both on the shorter and longer ends. Better US economic growth has also increased speculation that the Federal Reserve may withdraw stimulus before the European Central Bank. The EUR/USD is short-term oversold, but its long-term outlook is bearish. The pair failed to penetrate the 1.44-area resistance today. Strong resistance is in the 1.45- 1.46 area, the maximum upside we foresee for the pair. There is strong support from the 200-day moving average in the 1.42 area. If this is broken, the EUR/USD will renew its downtrend.

Financial and Economic News and Comments

US & Canada

• Midwest Manufacturing output increased in November. The Chicago Fed Midwest manufacturing index advanced 1.2% to a seasonally adjusted 84.2 in November after a revised 0.8% increase to 83.2 in October, the Federal Reserve Bank of Chicago said.


• The Dallas Fed general business activity index remained positive for a second consecutive month, increasing to 3.8 in December from 0.3 in November, the Federal Reserve Bank of Dallas said in its latest Texas manufacturing outlook survey.

Europe

• UK house prices increased 0.1% m/m to an average £156,900 ($251,118) in December, a fifth consecutive month-on-month gain, after a 0.2% m/m advance in November, Hometrack Ltd. reported. December house prices slid 1.9% y/y, easing from a 2.9% y/y November drop. Property prices will decline 1.0% in 2010 after stagnating in 2009.

Asia-Pacific

• Japan’s industrial production grew a seasonally adjusted 2.6% m/m in November, a ninth consecutive monthon- month gain and the most in six months, after a 0.5% m/m increase in October, according preliminary November IP data released by the Ministry of Economy, Trade and Industry (METI). The IP declined 3.9% y/y, easing from a 15.1% y/y October drop. The numbers were better than expected.

• Japanese retail sales increased a seasonally adjusted 0.2% m/m in November after a 0.9% m/m decline in October, the METI said. November retail sales fell 1.0% y/y, a 15th consecutive fall, after falling 1.0% y/y in October. Sales at large-scale retail stores fell 9.6% y/y in November, a 20th straight decline.

• Japan’s labor cash earnings fell 2.8% y/y in November, an 18th consecutive fall and the largest in four months, to ¥277,261 ($3,027), after a revised 1.9% y/y decline in October, according to data from the Ministry of Health, Labour and Welfare.

FX Strategy Update