Forex Commentaries

• The dollar and yen strengthened versus other key currencies Tuesday as risk aversion increased on more signs of deepening global contraction. Short dated Treasury yields fell to zero for the first time as investors sought safety of US government debt to avoid risk at the yearend. The euro weakened as US stocks and crude oil futures dropped. Sterling fell as UK industrial production dropped for the eighth month, the longest streak of declines since the 1980 recession. The Canadian dollar fell after the Bank of Canada cut its benchmark interest rate to 1.5%, the lowest since 1958, from 2.25%. The Australian dollar declined as Australian business confidence fell to a record low.


• The USD/JPY touched the important 92-area support on increased carry-trade unwinding. The yen gained against all key currencies despite negative Japanese economic data. The USD/JPY is in a clearly defined downtrend. There is resistance in the 97-area. If the 92-area support is broken, the pair may drop significantly and that would indicate further stock-market declines.

Financial and Economic News and Comments

US & Canada

• US pending home sales declined a less-than-expected 0.7% m/m to 88.9 in October, following September’s upwardly revised 4.3% m/m decline, according to the National Association of Realtors. Pending home sales fell 1.0% y/y.

• Congress and the Bush Administration are moving toward a $15 billion financial rescue of the Big Three auto makers, negotiating legislation that would give the US government a substantial ownership stake in the auto industry and a crucial role in its restructuring.


• The Bank of Canada slashed the target rate for overnight loans between commercial banks by 75 basis points to 1.5%, the lowest since 1958. Canada’s economy “is now entering a recession,” the BOC stated outright on that assessment for the first time. “The Bank will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required.”

Europe

• Eurozone investor confidence improved in December, with the ZEW eurozone economic sentiment index increasing to -46.1 from November’s -54.0, the ZEW Center for European Economic Research reported. However, the current economic situation index fell to -71.2 from November’s -58.9.

• Germany’s investor confidence unexpectedly rose for a second month in December, with the ZEW German economic sentiment index improving to -45.2 from November’s -53.5. The current economic situation index plunged to -64.5 from November’s -50.4. While the DAX dropped to a 3-year low in November, it has gained 2.7% since ZEW started its survey on November 24.


• UK industrial production fell 1.7% m/m in October, following September’s downwardly revised 0.3% m/m decline, the Office for National Statistics reported. Mining activity fell 7.3% m/m after rising 6.8% m/m, while energy outputs plunged 7.6% m/m. October IP dropped 5.2% y/y. In addition, manufacturing production declined 1.4% m/m in October, following September’s downwardly revised 0.9% m/m decline. October manufacturing production dropped 4.9% y/y. Industrial and manufacturing conditions will likely worsen as the UK economy is in its worst recession since 1991.


• The UK housing-market slump is deepening. House prices fell a more-than-expected 7.4% y/y in October after declining 5.1% y/y in September, the Department for Communities and Local Government said. Mortgage approvals fell 52% y/y, the Council of Mortgage Lenders said.


• UK real-estate agents and surveyors sold the fewest properties since recordkeeping started in 1978, the Royal Institution of Chartered Surveyors reported.


• Switzerland’s seasonally adjusted unemployment rate increased to 2.7% in November from 2.6% in October, the State Secretariat for Economic Affairs said. The seasonally adjusted figure of people without jobs increased 2,900 to 105,732.

Asia-Pacific

• Japan’s final Q3 GDP contracted 0.5% q/q, worse than expected, compared with a preliminary 0.1% q/q decline, data from the Cabinet Office showed. Final Q3 GDP contracted 1.8% y/y, also worse than anticipated, compared with a preliminary 0.4% y/y decline.


• Japan’s machine tool orders plunged 62.2% y/y in November after dropping 40.0% y/y in October, the Japan Machine Tool Builders Association reported. November machine tool orders fell 36.7 m/m.

• Japan’s leading index declined further to 85.0 in October, preliminary data from the Cabinet Office showed, following September’s downwardly revised 89.2. The coincident index fell to 97.6 in October from September's downwardly revised 100.1.

• Australia’s business confidence dropped to a record low in November, with the NAB business confidence index declining to -30 from October’s -29, the National Australia Bank reported. The business conditions index fell to -17 in November, its lowest level since 1997, from -11 in October. The declines in business confidence and business conditions indicate the Australian economy is sliding into its first recession since 1991.


• The Reserve Bank of Australia’s most aggressive interest-rate cuts since 1991 and government spending will provide “significant” support to the Australian economy, RBA Governor Glenn Stevens said. “There is scope to do more with macroeconomic policy settings if needed, given the strength of the public accounts at the federal level and the outlook for declining inflation,” Stevens said.

FX Strategy Update