Expert Analysis of Today's Market

• The dollar traded mixed on Monday after the US current account deficit narrowed more than expected and the Federal Reserve seemed to shift its monetary policy to a less dovish bias in reaction to rising US inflation pressure. The greenback gained against the euro and Australian dollar but fell versus the yen and sterling. The Canadian dollar rallied on technical factors and hopes of an economic recovery in the US. There is strong support at par, so the Canadian dollar’s gain is unlikely to continue.


• The EUR/USD fell to a 7-week low on concerns economic weakness is spreading to Europe. That inflationary pressures will constrain the Fed from making more aggressive rate cuts continues to pressure the pair. There are resistance in the 1.45-area, minor support in the 1.42 and strong support in the 1.40. We believe the pair will test the supports later this week.

Financial and Economic News and Comments

US & Canada

• The US Q3 current account deficit narrowed to a smaller-than-expected $178.5 billion, or 5.1% of gross domestic product, the Commerce Department said. This is the smallest current account deficit as a share of the economy since Q1 2004; the current account deficit totaled a revised $188.9 billion in Q2, or 5.5% of GDP.


• The National Association of Home Builders/Wells Fargo index of builder confidence was 19 as forecast for a third month, matching the lowest since records began in 1985. The traffic of prospective buyers’ indicator fell to a new low of 14 in December.

• The Empire State index of manufacturing fell more than expected to 10.3 in December from 27.4 in November, indicating a declining manufacturing sector, the New York Fed said. The employment index showed hiring in the manufacturing sector remains healthy, as the index rose to 12.83 in December from 10.63 in November.


• The US Treasury Department said international buying of US financial assets jumped in October as investors bought Treasuries at the fastest pace in almost two years and bought the most US stocks since May 2007. Total holdings of equities, notes and bonds rose a net $114 billion in October, after a revised increase of $15.4 billion in September, according to the TIC report.


• The Canadian dollar remained higher despite a report showed international investors reduced their holdings of Canadian securities by a net C$24.3 billion ($24 billion), Statistics Canada reported.

Europe

• The RBS/NTC Economics flash euro-zone composite output fell to a weaker-than-expected 53.3 in December, a 28-month low and the fifth drop in six months, from 54.1 in November. The manufacturing purchasing managers’ index fell to 52.5 in December from 52.8 in November, while the services purchasing managers index dropped to 53.2, a 30-month low, from 54.1. The indicators signal growth but at a decelerating pace.


• The PMI’s measure of prices charged in services rose to 54 in December, a 6-month high, from 53.6 in November. The same measure for manufacturing was the highest since July. The higher inflation indicators will make it difficult for the European Central Bank to lower rates. Euro-area inflation accelerated to 3.1% last month, the highest in more than six years.


• The ECB said it will “satisfy all bids at or above” 4.21% at a 2-week refinancing tender “with the aim of keeping interest rates close to the minimum bid rate” of 4.0%. Euro-money markets have so far failed to respond to central banks’ efforts to restore confidence. The euro interbank rate for 3-month loans in euros held close to a 7-year high of 4.95%, the European Banking Federation said. The Ted spread, the difference between the rate banks and the government pay for 3-month loans, held at 2.1% today.

Asia-Pacific

• Japan’s demand for services rebounded modestly. The tertiary index, a gauge of households and businesses spending on services, increased 1.1% in October after dropping a revised 1.8% in September, the Trade Ministry said.

FX Strategy Update