Forex Commentaries

• The dollar fell on Friday and for the week as investors pared back expectations for an early Fed rate increase following disappointing data of a December 85K employment decline. The unemployment rate held at 10.0% as the labor force shrunk. US wholesale inventories rose the most since October 2004, indicating improving business sentiment. The S&P 500 rose 3.29 to 1,144.98. The yen advanced after Japan’s PM Yuko Hatoyama said rapid forex moves are not good following earlier comments by new Finance Minister Naoto Kan that he welcomes a weaker yen. The euro rose despite disappointing European economic reports. EMU unemployment rose to an 11-year high and German industrial production rose less than expected. Sterling rose, boosted by stronger-than-expected producer-price inflation. The Australian and Canadian dollars were this week’s best performers as commodity prices rose and their interest-rate differential against the US widened.


• The dollar index fell on the weak US labor data. The Fed is unlikely to tighten its monetary stance unless the US labor market improves significantly. We believe labor-market conditions continue to improve despite the disappointing December decline. After breaking its sharp December uptrend, the dollar index is consolidating gains between support at the 77 handle and resistance in the low 78 area.

Financial and Economic News and Comments

US & Canada

• US nonfarm payrolls fell 85,000 in December, worse than market expectations, after an upwardly revised 4,000 increase in November, figures from the Labor Department showed. Revisions to October and November subtracted 1,000 from payrolls, but all the downward revision was due to government. Private sector revisions added 12,000 jobs. The strongest employment increases were for temps (+47,000), education/health (+35,000), and finance/insurance (+10,000), while the largest payroll losses were in construction (-53,000), manufacturing (-27,000), and leisure/hospitality (-25,000). Government payrolls fell 21,000 in December after a 4,000 increase in November. The unemployment rate remained at 10.0%, as forecast. Average hourly earnings increased as forecast 0.2% m/m to $18.80 in December, and rose 2.2% y/y. Average weekly hours was unchanged at 33.2, as expected.

• US business inventories unexpectedly rose 1.5% m/m in November, the most since October 2004, to $386.3 billion, after an upwardly revised 0.6% m/m increase in October, according to figures from the Commerce Department. Business sales grew 3.3% m/m, the largest gain since January 2008, to $337.4 billion, following October’s upwardly revised 1.4% m/m advance. The inventory-to-sales ratio was 1.14 at the end of November, down from October’s downwardly revised 1.17 and November 2008’s 1.29. Inventories decreased 11.0% y/y in November while sales increased 0.6% y/y.


• US consumer credit fell a record $17.5 billion in November, or 8.5% at an annual rate, to $2.46 trillion, after a revised $4.2 billion decline in October, figures from the Federal Reserve showed, registering a tenth consecutive monthly fall and the longest stretch of declines since record began in 1943.


• Canada’s employment unexpectedly fell 2,600 in December to 16,871,300 after a 79,100 gain in November, according to figures from Statistics Canada. The unemployment rate was unchanged at 8.5%, as forecast. Full-time employment fell 2,400 in December to 13,662,300 after gaining for three consecutive months, while part-time positions declined only 200 to 3,208,900. The participation rate lowered to 67.1 from November’s 67.2.

Europe

• Eurozone GDP grew an unrevised 0.4% q/q in Q3 2009, the first quarterly expansion since Q1 2008, after a 0.1% q/q decline in Q2, according to final Q3 GDP data released by Eurostat. The Q3 GDP fell a revised 4.0% y/y (vs. previously reported -4.1% y/y), easing from Q2’s 4.8% y/y contraction. Household consumption expenditure declined a revised 0.1% q/q in Q3 after a 0.1% q/q increase in Q2. Investments declined 0.8% q/q after a 1.6% q/q decrease. Government consumption expenditure rose an upwardly revised 0.6% q/q after rising 0.6% q/q. Exports grew an upwardly revised 3.1% q/q in Q3 after a 1.2% q/q decline in Q2, while imports increased an upwardly revised 3.0% q/q following Q2’s 2.8% q/q decrease.


• Eurozone unemployment rose a seasonally adjusted 102,000 to 15.712 million in November, Eurostat reported. The seasonally adjusted unemployment rate rose to a higher-than-expected 10.0%, the highest since August 1998, from October’s upwardly revised 9.9%.


• Germany’s seasonally adjusted exports grew a more-than-expected 1.6% m/m in November after a downwardly revised 1.9% m/m increase in October, while seasonally adjusted imports unexpectedly fell 5.9% m/m following October’s revised 2.9% m/m decline, figures for the Federal Statistical Office showed, helping push the trade surplus to €17.4 billion ($24.9 billion), the largest since June 2008, from a downwardly revised €13.4 billion. Exports declined 3.1% y/y nsa in November; imports dropped 14.8% y/y nsa. The current account surplus rose to €18.1 billion in November from an upwardly revised €11.1 billion the prior month.


• Germany’s seasonally adjusted industrial production increased a less-than-expected 0.7% m/m in November, the third gain in four months, rebounding from a revised 1.7% m/m decline in October, according to IP data from the Federal Ministry of Economics and Technology. November IP fell 8.0% y/y nsa wda, following a revised 12.3% y/y October drop.


• UK producer prices rose more than expected in December. PPI output rose 0.5% m/m last month after a 0.2% m/m increase in November, the Office for National Statistics said. December PPI output rose 3.5% y/y, the most since January. PPI input was up 0.1% m/m and 6.9% y/y in December.

Asia-Pacific

• The Australian Industry Group/Housing Industry Association performance of construction index increased to 49.3 in December from 47.6 in November, indicating Australia’s construction sector contracted for a second consecutive month but at a slower pace, following modest growth in October and September, according to an AiG/HIA report. The new orders index increased to 46.1 in December from 45.6 in November while the activity index declined to 46.5 from November’s 49.5; still, indicating both new orders and activity in the construction sector continued to contract last month. However, employment expanded in December, with the employment index rising to 52.6 from November’s contraction-level 45.8.


• The Japanese leading economic indicators index rose to 91.2 in November, a ninth straight monthly gain, from 89.4 in October, according to preliminary November LEI data released by the Cabinet Office. The coincident index advanced to 95.9, an eighth consecutive monthly rise, following October’s 94.3.

FX Strategy Update