Improved Risk Appetite Pressures Dollar and Yen

* The dollar rose against the yen but fell versus other currencies on Friday as US stocks gained for a fourth day. The US trade deficit narrowed more than expected in another sign that international trade is collapsing. US consumer confidence held near a 28-year low, but optimism on Wall Street continued. Stocks extended the biggest weekly gain for the Standard & Poor’s 500 since November. Increased risk appetite benefited most key currencies to the detriment of the dollar and yen. The euro rose modestly today and gained for a second week. Sterling also rose today but fell for a third consecutive week. The Canadian dollar advanced after a new successful test of support following news of higher-than-expected unemployment in Canada. The Australian dollar rose today and gained for a second straight week on increased risk appetite and higher commodity price. The AUD/USD improved after breaking the resistance from the 6-month downtrend. The Swiss franc weakened further following yesterday’s Swiss National Bank foreign-exchange intervention to lower the franc.

* Thee USD/JPY rose for a second day after finding support from the trend line. Following 6 straight weeks of gains, the pair was extremely overbought, moved sideways this week and tried to consolidate earlier gains. The USD/JPY is still in a well-defined trading channel, with support in the 97-area and resistance in the 100-area. If the support is broken, the pair may fall to the 94-area. However, we believe the pair will move higher as risk aversion fades.



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Financial and Economic News and Comments

US & Canada

* The US trade deficit in good and services fell more than expected to $36.0 billion in January, the lowest level in six years, from December’s 39.9 billion, data from the Commerce Department showed. Exports declined 5.7% m/m to $124.9 billion, the lowest level since September 2006, led by autos/parts and other capital goods, such as semiconductors and telecomm equipment. Exports dropped 16.4% y/y. Imports declined 6.7% m/m to $160.9 billion, the fewest since March 2005, led by petroleum (due to both lower prices and lower volume) and autos/parts. Imported plunged 22.8% y/y.

* The trade deficit with Japan shrank to the lowest level since January 1998, the trade gap with Canada narrowed to the lowest since May 1999, and the shortfall with the European Union shrank in half from $7 billion in December to $3.5 billion in January, while the trade gap with China widened to $20.6 billion in January from $19.9 billion as US exports to China fell faster than imports.

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* US import prices fell for a seventh consecutive month in February, with the US import-price index declining a less-than-expected 0.2% m/m, the smallest decline since it last increased in July, following January’s downwardly revised 1.2% m/m decrease, according to the Labor Department. Import prices dropped 12.8% y/y in February, the deepest decline since records began in 1982.

* US consumer confidence stayed near a 28-year low in March. The Reuters/University of Michigan preliminary index of consumer sentiment unexpectedly increased to 56.6 from February’s 56.3; however, remaining near November’s 55.3, the lowest level since 1980. The current conditions index declined to 62.3 in March from 65.5 in February, while the consumer expectations index increased to 53.0 from 50.5. Consumers in the March survey said they expect a 2.2% inflation rate over the next 12 months, up from 1.9% in the February survey.

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* Canada’s employment in February fell a more-than-expected 82,600, following January’s record drop of 129,000, according to Statistics Canada. The unemployment rate rose more than estimated to 7.7%, the highest since 2003, from January’s 7.2%.

* The Canadian trade deficit widened to C$0.993 billion ($786 million) in January, in line with forecast, the largest since records began in 1971, following a revised C$0.7 billion deficit in December, Statistics Canada reported.

Europe

* Eurozone retail sales increased a slightly less-than-expected 0.1% m/m in January after a downwardly revised 0.3% m/m decline in December, according to Eurostat. Retail sales fell a less-than-expected 2.2% y/y, following December’s downwardly revised 2.4% y/y drop.

* Eurozone labor costs increased a more-than-expected 3.8% y/y in Q4 2008; however, decelerating from Q3’s upwardly revised 4.2% y/y rise, data from Eurostat showed.

* German wholesale prices fell for a seventh consecutive month in February, declining 0.1% m/m, after January’s 0.4% m/m slide, according to Federal Statistical Office. Wholesale prices dropped 5.7% y/y, following January’s 5.9% y/y contraction.

* Swiss producer and import prices were down a more-than-expected 0.6% m/m in February, down 1.8% y/y, the Swiss Federal Statistical Office reported.

Asia-Pacific

* Japan’s industrial production was revised lower to a 10.2% m/m decline in January, according to final January IP data from the Ministry of the Economy, Trade and Industry, following December’s 9.8% m/m decline. Industrial production plunged 31.0% y/y, lower than the previously reported, following December’s 20.8% y/y drop. Capacity utilization was downwardly revised to a 12.9% m/m contraction in January.

* Japanese consumer confidence improved for a second month in February, with the Japanese confidence index increasing slightly more than expected to 26.7 from January’s 26.4; however, remaining near December’s 26.2, the lowest since records began in 1982, data from the Cabinet Office showed.

FX Strategy Update



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Source: Hans Nilsson

13.03.2009