Expert Analysis of Today's Market

• The dollar rose against most key currencies on Wednesday after stronger-than-expected US data. The euro was particularly weak following ECB council member Yves Mersch’s warning of “downside risks” to EMU’s economic expansion. The yen fell as US equity prices stabilized. The Swiss franc was also lower as some risk appetite returned to the FX market. The Canadian and Australian dollars were modestly lower pressured by lower commodity prices and carry-trade unwinding.


• The EUR/USD fell the most in a month after ECB council members’ comments today increased the likelihood of ECB interest-rate cuts and improved the relative yield differential in the dollar’s favor. The pair is now below 1.48, which now acts as resistance with support at 1.45.

Financial and Economic News and Comments

US & Canada

• The US consumer price index rose 0.3% m/m (0.2% expected) and 4.1% y/y in December. The core CPI rose 0.2% m/m (in line with expectations) and 2.4% y/y. Inflation is still running high, but the Federal Reserve is likely to focus more on growth.

• US industrial production was unchanged in December, better than the consensus expected 0.2% m/m decline; for the year industrial production rose 1.5%. Capacity utilization fell to 81.4% in December from 81.6% in November.


• The Fed said economic activity increased at a slower pace in late-November and December, with districts reporting disappointing holiday sales. “Economic activity increased modestly during the survey period,” though “at a slower pace,” the Fed reported in its Beige Book. “Most reports on retail activity indicated subdued holiday spending and further weakness in auto sales.”


• Net foreign buying of US financial assets totaled a larger-than-expected $90.9 billion in November, from $114 billion the prior month, Treasury International Capital (TIC) data showed.


• The National Association of Home Builders’ index for sales of new, single-family homes rose to 19 in January from a downwardly revised 18 in December, according to NAHB.

Europe

• ECB council member Yves Mersch, who was usually a hawk, sounded pretty dovish today when he said he saw risk to the economic expansion. “We have certainly downside risks to economic activity.” While inflation risks have risen, “we’re not unaware of mitigation to price developments,” he said, citing a stronger euro, near-record oil prices, the slowing US economy and higher credit costs.


• ECB council member Axel Weber said that while risks to eurozone inflation remain to the upside, the market shouldn’t “overdramatize” current elevated inflation rates.


• UK jobless claimants dropped 6,400 to 807,700 in December, the Office for National Statistics said. Wages including bonuses rose 4.0% in the 3 months through November. The unemployment was 5.3% the quarter through November. The unemployment rate, based on jobless benefit claims, was 2.5%, matching the lowest since 1975.

• The number of UK real-estate agents and surveyors saying house prices fell exceeded those reporting gains by 49.1 percentage points in December, compared with 40.6 points in November, the Royal Institution of Chartered Surveyors said. In London, confidence in prices fell to the lowest since 2003.

Asia-Pacific

• 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.

• Australian consumer confidence fell in January by the most in 14 months. The sentiment index fell to 103.1 in January from 112.5 in December and the expectations component fell from 113.7 to 100.5 for the same period, according to Westpac Banking Corp. Readings above 100 shows optimists outnumber pessimists.


• Japan’s current account surplus widened 2.1% m/m in November, the Finance Ministry said, as exports to China and other emerging markets compensated for slowing US exports.


• Japan’s producer prices rose a stronger-than-expected 2.6% y/y in December, following a 2.3% y/y increase in November, the Bank of Japan said.

FX Strategy Update