EUR/USD Testing Support

EUR/USD Testing Support

* The dollar rose against its rivals on Thursday but later pared gains after US stocks reversed earlier large losses. The large sell-off in the financial sector relented on speculation that the government is working to subsidize some mortgage payments. The administration’s efforts to stimulate the economy had so far fallen short of the market’s high expectations, but this new report helped stocks coming off important support levels. Despite an unexpected increase in US retail sales, today’s other economic releases confirmed the economy’s recessionary state. The yen declined against the greenback as stocks recovered. The USD/JPY is highly correlated with US stocks and both are trying to find support at these levels. The dire banking outlook and speculations the UK economy may enter a liquidity trap hurt sterling. The Australian dollar was also pressured after the Australian Senate blocked passage of the government’s A$42 billion stimulus bill. The Canadian dollar declined as crude oil fell to a 3-week low in New York.

* The EUR/USD fell as eurozone industrial production dropped a record 2.6% m/m in December. The European Central Bank said weakness in eurozone economic activity is expected to persist and growth risks remain “clearly” on the downside. The ECB believes inflation will be below its inflation target. We believe this combination of falling activity and inflation could lead to greater rate cuts than expected, which should mitigate the deteriorating economic situation. The pair has support in the 1.28-area, which held again today, and solid support in the 1.24. There is resistance in the 1.31-area. A more simulative ECB stance may actually support the EUR/USD as it will likely improve the growth outlook.



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Financial and Economic News and Comments

US & Canada

* US retail sales unexpectedly increased for the first time in seven months in January, gaining 1.0% m/m, following December’s downwardly revised 3.0% m/m drop and November’s downwardly revised 2.4% m/m decline, data from the Commerce Department showed. The 1.0% gain seemed to be a correction for drops during the holidays rather than the beginning of a recovery in consumer spending; nevertheless, the gain snapped a string of declines that had begun last July. Gains in retail sales were widespread in January, led by food and beverage stores, motor vehicles/parts, gas, and non-store retailers (mail order and internet). The weakest category was building materials. Retail sales excluding autos unexpectedly increased 0.9% m/m, following December’s downwardly revised 3.2% m/m decline. Retail sales fell 9.0% y/y and fell 5.8% y/y excluding autos. Sales excluding autos, building materials, and gas increased 1.2% m/m in January, the largest gain in more than two years. This is the portion of the retail report that impacts GDP calculations, which are likely to show a slight improvement in personal spending in Q1 2009.

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* US initial jobless claims remained near quarter-century highs above 600,000, declining 8,000 to 623,000 in the week ending February 7, following the prior week’s upwardly revised 631,000, according to the Labor Department. The 4-week average of new jobless claims rose 24,000 to 607,500, the highest since November 1982. Continuing jobless claims in the week ending January 31 inched closer to the five-million mark, jumping 11,000 to 4,810,000, the highest level since records began in 1967, following the prior week’s upwardly revised 4,799,000. The insured unemployment rate remained at a 25-year high of 3.6%. Overall, the dismal figures point to further dramatic job losses in February.

* US business inventories fell a more-than-expected 1.3% m/m, the sharpest fall since October 2001, to a seasonally adjusted $1.461 trillion in December, after a downwardly revised 1.1% m/m decrease in November, data from the Commerce Department showed. Business sales decreased 3.2% m/m to $1.017 trillion, following November’s downwardly revised 5.7% m/m drop. The inventory-to-sales ratio increased to 1.44 in December, the highest since 1.44 in September 2001, from 1.41 in November. The rising I/S ratio could mean a big correction in inventories in early 2009. That could weigh on GDP in coming months. In December, business inventories increased 0.8% y/y, while business sales plunged 9.1% y/y.

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* US home prices dropped a record 12% y/y in Q4 2008 and sales of properties with mortgages in default accounted for 45% of all transactions, the National Association of Realtors reported. Home prices fell in 134 US metropolitan areas, increased in 18 and were unchanged in one, the largest share of declines in data since 1979.

Europe

* Eurozone industrial production dropped a more-than-expected 12.0% y/y in December, the biggest since records began in 1986, following a downwardly revised 8.4% y/y fall in November, data from Eurostat showed. Industrial production fell a more-than-expected 2.6% m/m, its sharpest fall since 1989, after November’s downwardly revised 2.2% m/m decline.

* The European Central Bank said in its February monthly bulletin that weakness in eurozone economic activity is expected to persist over the coming quarters, as growth risks remain “clearly” on the downside. Eurozone inflation will average 0.9% in 2009 and 1.6% in 2010 as the recession damps price growth, while the economy will contract 1.7% in 2009 and grow slightly 0.6% in 2010, according to the ECB professional forecasters survey.

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* Switzerland’s consumer confidence improved slightly in January with the Swiss SECO consumer confidence index unexpectedly increasing to -23 from October’s 5-year low of -27, according to the State Secretariat for Economic Affairs.

* ECB Governing Council member Lucas Papademos said an interest-rate cut may be appropriate at the ECB March meeting if inflationary pressures are easing and risks to price stability are judged to be on the downside. He also said nonstandard measures aimed at improving the functioning of markets may be taken “independently” of the level of the key policy rate.

Asia-Pacific

* Australian employment unexpectedly increased 1,200 in January to 10,742,100, the Australian Bureau of Statistics reported. While full-time employment increased 33,700 to 7,670,700, part-time employment declined 32,600 to 3,071,400. The unemployment rate rose more than expected to 4.8% in January from 4.5% in December. The participation rate unexpectedly increased to 65.1 from 65.0%.

* Australian business confidence dropped further in Q4 2008 with the NAB Australian business confidence index plunging to -42 from Q3’s -7, National Australia Bank reported.

* The Bank of Korea cut its 7-day repurchase rate 50 basis points to 2.00%, seeing scope for further rate cuts as the economy posted its most severe decline in 10 years in Q4 2008.

FX Strategy Update




Hans Nilsson and Winnie Tapasanun
New York, February 12, 2009, 16:08 EST

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13.02.2009