Expert Analysis of Today's Market

• The dollar gained modestly against the euro and sterling ahead of tomorrow’s European interest-rate decisions but fell slightly versus the yen as US stocks declined increasing risk aversion. Mixed US economic data did little to change the overall outlook for the US economy. US productivity rose more than expected, but the reduction in hours worked points to further US economic slowdown. The Bank of England’s Monetary Policy Committee will cut its key lending rate by a quarter-point to 5.25% tomorrow.


• The EUR/USD traded above the important 1.46-handle support after yesterday’s drop. We agree with the consensus that the European Central Bank will keep rates steady at 4.0%. The ECB has a policy dilemma as inflation is still well above the ECB’s target but the EMU economic outlook is deteriorating. If the ECB sticks to a hawkish bias, it may temporarily help the pair on better yield differential but may further worsen the growth outlook. Therefore, we think the ECB will take a more accommodating view. There is resistance at the 1.48- handle.

Financial and Economic News and Comments

US & Canada

• US productivity rose a stronger-than-expected 1.8% annualized rate in Q4 following a downwardly revised 6.0% rise in Q3, the Labor Department said. Non-farm productivity rose 2.6% y/y. Unit labor costs rose a smaller-than-expected 2.1% annualized rate in Q4 and increased 1.0% y/y. Hours worked fell at a 1.5% q/q annualized pace and the trend is falling, indicating a negative outlook for the labor market and further decline in economic activity. Real (inflation-adjusted) compensation per hour in the non-farm sector declined at a 0.3% annualized rate in Q4, down 0.3% y/y.

• Philadelphia Fed President Charles Plosser said he would advocate more interest-rate cuts if the economy suffers more than expected, but that the central bank “must not lose sight of the other part of the Fed’s dual mandate -- which is price stability.”


• Ivey’s PMI index for Canada showed spending rose in January, after a drop in December. The index rose much more than expected to 56.2 in January from 45.9 in December. Meanwhile, building permits gained 0.4% m/m to C$6.06 billion ($6.03 billion) in December, Statistics Canada reported.

Europe

• UK consumer sentiment fell to 81 in January from 85 in December, the lowest since at least 2004, Nationwide Building Society said.


• UK consumer sentiment fell to 81 in January from 85 in December, the lowest since at least 2004, Nationwide Building Society said.

Asia-Pacific

• Japan’s economic expansion is likely to slow further in the 3-6 months. The Japanese diffusion index rose to 40 in December from 18.2 in November, still indicating slower growth as it is below 50. The composite index fell to 97.4 in December from 97.8 in November, the Cabinet Office said.

• Finance Minister Lindsay Tanner said Australia’s government will apply “sensible fiscal restraint” to help damp price pressures. “We are going to work extra hard to put downward pressure on inflation” and interest rates, he said.

FX Strategy Update