Expert Analysis of Today's Market

• Slightly lower against most key currencies on Friday, the dollar consolidated this week's large gains particularly versus the European currencies. The yen was little changed ahead of the G-7 meeting this weekend. The Canadian dollar rallied on a stronger-than-expected employment report reducing expectations of early Bank of Canada interest-rate cuts.


• The EUR/USD is hovering at the 1.46-handle following big losses this week. The triple top is likely to indicate further losses for the pair and may even be a secular top. The market has shifted away from the euro’s relative interest-rate advantage toward a relative growth disadvantage as the European Central Bank’s reluctance to ease monetary policy to spur economic growth is seen as further slowing EMU economic growth, while the Federal Reserve’s aggressive rate cuts are seen as helping US growth. There are resistance in the 1.45-1.46 area and strong support in the 1.43-area.

Financial and Economic News and Comments

US & Canada

• US wholesale inventories increased a larger-than-expected 1.1% m/m in December to a seasonally adjusted $411.60 billion, after rising a revised 0.8% in November, the Commerce Department said. Sales of US wholesalers fell 0.7% m/m in December to a seasonally adjusted $376.65 billion, lifting the inventory to sales ratio to 1.09 months from November’s 1.07 record low. Mounting inventories is a bad sign for the economy when it is caused by unwanted buildup in inventory and that does not bode well for future production.

• San Francisco Fed President Janet Yellen said yesterday the US economy will probably avoid a recession and that interest-rate cuts should help growth pick up later in the year. However, she seemed concerned about downside risk to the economy: “I see the growth risks as skewed to the downside for the near term.” We believe the risk for a recession is about 80%, the latest Globicus leading economic indicator showed.

• Canada added 46,400 jobs in January, more than four times as many as anticipated. The unemployment rate fell to 5.8% in January from 6.0% in December, returning to a 33-year low set in October, Statistics Canada said. The strong labor market will make it difficult for the Bank of Canada to cut rates.

Europe

• German industrial production rose a slightly less-than-forecast 0.8% m/m in December, the Economy Ministry said. Production rose 4.1% y/y.

Asia-Pacific

• Japan’s Economy Watchers index fell to 31.8 in January from 36.6 in December, the biggest monthly drop ever, the Cabinet Office said. The index is now at a 6-year low and unlikely to recover soon, indicating a slowing Japanese economy.

• Japan’s machinery orders fell a more-than-expected 3.2% m/m in December following a 2.8% m/m decline in November, the Cabinet Office said. Machinery orders are a leading indicator of business spending in the next 3-6 months indicating the economy is not going to get much support from business investment.

FX Strategy Update