Expert Analysis of Today's Market

• The dollar traded mixed on weaker-than-expected US economic data on Friday. The yen and Swiss franc rose as falling US stocks increased risk aversion and demand for carry-trades. The Australian dollar rose as the Reserve Bank of Australia is seen to increase the aussie's yield advantage. The Canadian dollar fell on weaker-than-expected Canadian factory shipments increasing expectations of further Bank of Canada interest-rate cuts. Sterling fell today and pared its weekly advance on speculation the UK economic outlook is faltering and on profit-taking ahead of next week's Bank of England minutes.


• The EUR/USD is set for the biggest weekly gain this year as a decline in New York manufacturing and tumbling consumer confidence added to concern that the US economy is headed for a recession. However, the pair did not break the 1.47-handle resistance despite today's weak US data and yesterday's Bernanke's dovish comment. The dollar does not always fall during a recession. Interestingly, the greenback has not declined more despite recessionary warnings and significant interest-rate cuts. This may indicate that the US economic weakness is spreading and the European Central Bank and other central banks are behind the curve.

Financial and Economic News and Comments

US & Canada

• US consumer confidence dropped more than expected in February, adding to evidence that the economic slowdown is accelerating. The Reuters/University of Michigan index of consumer sentiment fell to 69.6 and consumer expectations fell to 59.4 for early February. Expectations are at the lowest level since the 1991 recession.

• US industrial production increased 0.1% m/m and 2.2% y/y, Federal Reserve figures showed. Manufacturing was unchanged from December. Capacity utilization was unchanged in January at 81.5%. Industrial production shows signs of improving from last year's sluggish pace, probably helped by strong foreign demand.

• Former Federal Reserve Chairman Alan Greenspan said the chance of a US recession is 50% or better. “We are clearly on the edge….While we are at stall speed in the US at the moment, we haven’t yet seen the discontinuity that characterizes recession….American business was in such extra-good shape before this problem hit. Otherwise we would be talking about how long and how deep. We are not there yet.” The Globicus leading economic index shows an 80% chance of a US recession in early 2008 (higher chance than Greenspan thinks).

• The New York Fed’s manufacturing index fell more than expected to -11.72 in February, the lowest level since 2003, from 9.03 in January. New orders fell to -11.88 in February, the fourth straight month decline. The employment index also fell below zero to -2.11 from 2.44.

• US import prices rose a stronger-than-expected 1.7% m/m and 13.7% y/y in January, the biggest yearly increase since records began in 1982, the Labor Department said. Import prices excluding petroleum rose 0.6% m/m and 3.6% y/y. Export prices increased 1.2% m/m in January and rose 6.7% y/y, the largest gain since the 1980s.


• Canadian factory shipments fell a stronger-than-expected 3.4% m/m in December to C$48.6 billion ($48.5 billion), the lowest in three years, Statistics Canada reported. The decline was led by the biggest drop in automobile production since 1996.

Europe

• European exports declined 2.5% m/m in December, the biggest drop since October 2005, as slowing global growth and the high value of the euro hurt exports, the Eurostat reported. The trade balance fell to a €2.1 billion ($3.1 billion) deficit in December from a €2 billion surplus in November. While exports declined in the month, imports rose 0.7% m/m.

Asia-Pacific

• The Bank of Japan left interest rates unchanged at 0.5% as expected. BOJ Governor Toshihiko Fukui said financial markets remain volatile and surging raw materials costs are threatening growth by squeezing profits and forcing employers to keep wages low. “Due attention should continue to be paid to factors such as uncertainties regarding future developments in overseas economies and global financial markets, as well as the effects of high energy and materials prices,” Fukui said.


• Japanese machinery orders, a leading indicator of capital spending, fell 3.2% m/m and 3.4% y/y in December.

FX Strategy Update