The FOMC Minutes were quite bleak.


MAJOR HEADLINES – PREVIOUS SESSION

  • US NOV Pending Home Sales at -4.0% m/m vs -1.0% expected

  • US NOV Factory Orders at -4.6% vs. -2.3% expected

  • US DEC ISM Non-Manuf Index at 40.6 vs. 36.5 expected

  • NZ Trade Balance (Nov) –NZD520 mln vs revised –NZD996 mln prior

  • AUST DEC HIA New Home Sales -1.1% m/m vs 4.5% prior

  • AUST NOV Retail sales +0.4% m/m S/ADJ vs -0.3% expected

  • AUST NOV Retail Sales +0.1 PCT m/m in trend terms


THEMES TO WATCH – UPCOMING SESSION

Events Today:

  • GE Unemployment change (Dec) (0855)

  • EU PPI m/m (Nov)(1000)

  • UK BRC Shop Price Index (Dec) (1030)

  • US Challenger Layoffs m/m (Dec) (1230)

  • US ADP Hiring m/m (Dec) (1315)

Market Comment:

The positive start in 2009 for the USD encountered some obstacles overnight as the first frontline US data releases of the year hit the markets. The ISM services index for Dec came in above-forecast (40.6 vs 36.9) but this was overshadowed by horrendous pending home sales and factory goods orders (-4.0% vs 1.0% and -4.6% vs -2.3% resp). Adding to this, the minutes of the Dec FOMC minutes continued to highlight the substantial downside risks to the economy and an appreciable reduction in inflation hence US rates were likely to remain at ‘exceptionally low’ levels for ‘some time’.

As a result of the greenback’s u-turn, the EUR was spared a more heavy sell-off, halting the slide just above 1.3300 and reversing the losses resulting in Asia coming in to almost unchanged levels. The sharp rebound risks an extension higher, for EURUSD but, given the growing expectations for deeper ECB rate cuts and dismal data/news out of Europe, the EUR’s rally will be seen as a good opportunity to put on fresh short trades.

Australia surprised the market with some upbeat retail sales data this morning. Nov sales came in at a seasonally-adjusted +0.4% m/m compared with an expected -0.3%. This gave the AUD a lift amid a mildly bearish tone at the start, but the up-move could only muster a 30-40 tic rally before consolidating.

On the opposite end of the spectrum, UK chancellor Darling was again painting a gloomy (gloomier?) outlook for the UK economy. His comments in the FT centred round the fact that the government’s forecasts of a potential turnaround in the UK economy in the second half of 2009 could prove well off the mark. “This year is going to be difficult, with some tough calls”, he concluded. GBP was in a slow grind lower during the Asian morning, losing ground across the board. The BOE MPC meeting starts today, with the decision announced tomorrow, and the extent of UK rate cuts will be the main topic of discussion.

Today’s ADP private employment report in the US should be a major focus to provide insight into the potential ‘grimness’ of the NFP report on Friday, although the series has been notoriously unreliable in recent times, and the USD is likely to react accordingly on any divergence from the consensus -470k. Friday’s NFP have already been telegraphed as being a gloomy number, and FX markets risk over-reacting to a worse number.

CHART: EURUSD

EURUSD

EURUSD – 1.3550 again proving to be the key level today. Above risks a sharp rally to 1.3630 but then down again.

Should early test of 1.3550 fail then we head immediately to 1.3350 again.