Dollar Gains as Stocks Slump

* The dollar and yen ended a volatile week on a strong note on Friday. Risk aversion rose on growing concerns over the financial company outlook and the sustainability of the economic recovery. Personal income and personal consumption were weak as expected and consumer conference declined, but manufacturing activity was stronger than anticipated. Commodity prices and bond yields fell and the S&P 500 index dropped 29.92 to 1,036.19. The yen rose on carry trade unwinding. The Bank of Japan maintained the benchmark interest rate at 0.10% and will end its corporate bond purchase program. Sterling fell today but rose for the week. The Australian dollar was pressured by falling commodity prices and declining private sector credit. The Reserve Bank of Australia is expected to raise its key rate by 25 basis points to 3.50% early next week. The Canadian dollar fell on dropping crude prices and an unexpected GDP contraction.

* The EUR/USD fell on Friday and had its first weekly loss in five weeks on increasing risk aversion and declining stock markets. Eurozone consumer-price inflation declined and unemployment rose. European Central Bank council member Axel Weber said yesterday that policy makers may scale back the bank’s longterm loans to banks, but the mild deflation and high unemployment rate will make it difficult for the ECB to raise rates in the near future. After failing to break the 1.50-area resistance, the EUR/USD is now consolidating earlier gains. There is important support from the uptrend in the 1.47 area. If the long-term uptrend is broken, the EUR/USD will turn bearish.



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Financial and Economic News and Comments

US & Canada

* US personal income was unchanged in September after a downwardly revised 0.1% m/m increase in August, while personal spending fell 0.5% m/m, the largest fall since December 2008, with the end of the “cash for clunkers” auto trade-in program, following August upwardly revised 1.4% m/m rise, according to a Commerce Department report. Both data were in line with market expectations. Disposable personal income was unchanged in September but increased 0.5% y/y. The overall PCE deflator increased 0.1% m/m in September but declined 0.5% y/y. The core PCE deflator increased 0.1% m/m in September and rose 1.3% y/y.

* The Chicago business barometer rose more than expected to 54.2 in October from 46.1 in September, indicating US business activity expanded for the second time in three months and “recovered from the September stumble,” according to the Chicago Report by Kingsbury International, Ltd. and the Institute for Supply Management – Chicago, Inc. The production index soared to 63.9 in October from 47.2 in September, showing the broadest expansion in 13 months. The new orders index jumped to 61.4, its highest level since June 2007, from September’s 46.3. The employment index slipped to 38.3 in October from 38.8 in September. Inflation poses no immediate threat in October, with the prices paid index declining to 48.6 from September’s 51.3; thus, supporting the view the Fed is in no rush to raise interest rates.

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* The Reuters/University of Michigan US consumer sentiment final index for October declined to 70.6 from 73.5 in September, indicating US consumer confidence slipped this month with consumers being nervous about job prospects and a steady yet fragile US economic recovery, Reuters and University of Michigan data showed. The final October number was better than expected and revised up from a preliminarily reported 69.4. The current economic conditions index increased to an upwardly revised 73.7 in October, the highest in a year, from 73.4 in September. The consumer expectations index declined to an upwardly revised 68.6 from September’s 73.5, which was a 2-year high.

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* US employment costs rose 0.4% q/q in Q3 2009, as forecast, after rising at the same rate in Q2, according to a Labor Department report.

* Canada’s GDP unexpectedly declined 0.1% m/m in August after being unchanged in July, GDP data released by Statistics Canada showed, signaling Canada is struggling to emerge from its recession and may not have followed the US out of the recession in Q3 2009. The August GDP decline was mainly due to a 2.3% m/m decrease in oil and gas extraction and a 0.7% m/m decline in manufacturing. August GDP contracted 4.0% y/y.

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Europe

* Eurozone consumer prices fell 0.1% y/y in October, as forecast and a fifth consecutive year-on-year fall, a flash CPI estimate released by Eurostat showed, after a 0.3% y/y decrease in September.

* The eurozone seasonally adjusted unemployment rate increased to 9.7% in September, as forecast and the highest rate since January 1999, from 9.6% in August, compared to 7.7% in September 2008, according to data from Eurostat.

* Germany’s retail sales unexpectedly fell for a second month in September, falling 0.5% m/m, after a revised 1.8% m/m decrease in August, data from the Federal Statistical Office showed. September retail sales fell 3.9% y/y, more than expected.

* The GfK NOP consumer confidence index increased slightly more than expected to -13 in October from -16 in September, indicating UK consumer confidence rose to the highest level since January 2008, according to data from GfK NOP.

* UK house prices increased a less-than-expected 0.4% m/m in October, a sixth straight month-on-month gain, to an average of £162,038 ($268,340) per home, after a 0.9% m/m advance in September, according to figures from Nationwide Building Society. October house prices rose 2.0% y/y, turning positive for first time since March 2008, following September’s 0.0% y/y.

* The KOF Swiss leading economic index rose more than estimated to 1.45 in October from a downwardly revised 0.77 in September, indicating Switzerland’s annual GDP growth rate should be about to return into positive territory, according to the Konjunkturforschungsstelle Swiss Institute for Business Cycle Research.

Asia-Pacific

* The Nomura/JMMA PMI declined to 54.3 in October from 54.5 in September, indicating Japan’s manufacturing activity expanded for a fourth consecutive month albeit at a slightly slower pace, according to data released by Markit Economics.

* Japan’s core consumer prices, which exclude fresh food, declined a slightly less-than-expected 2.3% y/y in September after a record 2.4% y/y drop in August, CPI data from the Statistics Bureau showed. The CPI excluding food and energy in September fell 1.0% y/y, as forecast, after falling 0.9% y/y in August. Tokyo’s core CPI dropped a record 2.2% y/y in October after a 2.1% y/y slide in September. Prolonged deflation may hamper Japan’s economic recovery.

* Japan’s unemployment rate unexpectedly fell for a second month, falling to a 4-month low of 5.3% in September from 5.5% in August, according to data from the Statistics Bureau. The job-to-applicant ratio, a leading indicator of employment trends, increased to 0.43 in September, the first improvement in more than two years, from a record low of 0.42 in August.

* Japanese household spending increased 1.0% y/y in September after a 2.6% y/y gain in August that was the largest in 19 months, a separate report from the Statistics Bureau showed.

* Japanese housing starts fell 37.0% y/y in September, a tenth straight year-on-year fall and in line with expectations, after a 38.3% y/y decrease in August, according to figures from the Ministry of Land, Infrastructure and Transport. September annualized housing starts increased to a seasonally adjusted 699,000, as forecast, from 676,000 in August. Construction orders fell for an eleventh consecutive month in September, falling 14.0% y/y; however, easing from August 25.2% y/y drop.

* Australia’s private sector credit unexpectedly declined 0.2% m/m in September after an upwardly revised 0.2% m/m increase in August. September private sector credit grew a less-than-expected 1.7% y/y, following August upwardly revised 2.6% y/y. Housing credit was up 0.7% m/m in September, up 7.7% y/y.

* The Bank of Japan voted unanimously to keep its key interest rate unchanged at 0.10%, as forecast. The BOJ said it will “maintain the extremely accommodative financial environment for some time by holding interest rates at their current low levels and providing ample funds sufficient to meet demand in financial markets.” The central bank stated that financial conditions in Japan have shown “signs of improvement, particularly in the CP and corporate bond markets.” Thus, the BOJ made the following decisions: 1) “special funds-supplying operations to facilitate corporate financing will remain in effect until the end of March 2010”; 2) “outright purchases of CP and corporate bonds will expire at the end of 2009 as scheduled”; 3) “expansion in the range of corporate debt and asset-backed commercial paper eligible as collateral will remain in effect until the end of 2010”; and 4) “complementary deposit facility will remain in effect for the time being,” according to the BOJ monetary statement released today.

* According to the BOJ statement on the outlook for economic activity and prices, the central bank stated that “Japan's economy headed toward a pick-up following the rapid and substantial deterioration in the second half of fiscal 2008” and the economic outlook from the second half of fiscal 2009 through fiscal 2011 is “likely to continue to hinge greatly on developments in the global economy.” Regarding inflation, the BOJ expects Japan’s core CPI (excluding fresh food) rate of decline to “slow down significantly in the second half of fiscal 2009, reflecting the waning effects of the drop in the prices of petroleum products from a year before,” forecasting that the core CPI rate of decline from 2010 onward will “likely to continue to moderate as the aggregate supply and demand balance improves gradually.” See the forecasts of the majority of BOJ policy board members in the table below. Figures in brackets indicate forecast medians.

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FX Strategy Update




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Source: Hans Nilsson

30.10.2009