USD/JPY Recovers from 13-Year Low

USD/JPY Recovers from 13-Year Low

The dollar traded mixed on Friday. US retail sales declined for a fifth consecutive month and producer prices fell for a fourth straight month as the recession deepens. The dollar recovered from a 13-year overnight low against the yen as US stocks rose on speculation the Bush Administration will use TARP funds to rescue the US auto industry. The euro was below the 1.34-area resistance as European industrial production dropped more than expected. Sterling fell against the dollar and dropped to a new record low against the euro. The Australian and Canadian dollars declined on increased risk aversion and lower commodity prices. The Federal Reserve is likely to cut its federal funds rate 25 basis points to 0.75% at the 12/16 FOMC rate decision meeting.

The USD/JPY closed lower, after dropping over 3% to 88.18, the lowest level since 1995. The pair fell as risk aversion increased and the Nikkei closed down 5.6%. The pair recovered most of its losses on renewed hopes that the auto bailout will happen despite the failure of the Senate to pass the bill. The risk of intervention also supported the pair after Finance Minister Shoichi Nakagawa told a news conference that excessive exchange rate volatility is undesirable. The USD/JPY is in a clearly defined downtrend. There is resistance in the 93-area. If the 90-area support is broken, the pair could drop significantly. However, that could mean Japanese intervention to sell the yen.

Financial and Economic News and Comments

US & Canada

US producer prices declined a more-than-expected 2.2% m/m on a seasonally adjusted basis in November, after dropping 2.8% m/m in October, Labor Department data showed. The PPI was up just 0.4% y/y. The November PPI drop was attributable to energy, which fell 11.2% m/m. The core PPI, which excludes food and energy, increased 0.1% m/m in November and rose 4.2% y/y, still nearly the most in twenty years. Consumer goods prices declined 2.9% m/m in November, down 0.6% y/y. Capital equipment prices increased 0.1% m/m in November, up 3.7% y/y. Intermediate goods prices fell 4.3% m/m in November but increased 2.5% y/y. Crude prices dropped 12.5% m/m in November, down 19.2% y/y.

US retail sales declined 1.8% m/m in November, in line with our forecast, due to falling gas prices, following October's downwardly revised 2.9% m/m drop, Commerce Department data showed. Retail sales excluding autos declined 1.6% m/m, following October's downwardly revised 2.4% m/m fall. Retail sales dropped 7.4% y/y and declined 2.9% y/y excluding autos. Sales excluding autos, building materials, and gas were up 0.5% m/m in November, the first increase after three consecutive monthly declines and the biggest gain in six months. These sales increased 0.9% y/y.

US business inventories fell a more-than-expected 0.6% m/m to a seasonally adjusted $1.497 trillion in October, following September's downwardly revised 0.4% m/m decline, Commerce Department data showed. Business sales fell 3.5% m/m to a level of $1.119 trillion, following September's downwardly revised 2.4% m/m decline. Inventories rose 4.6% y/y, while sales fell 1.6% y/y.

Canada's capacity utilization rate was at 77.4% in Q3, lower than expected and the lowest since records began in 1987, following a downwardly revised 77.7% in Q2, data from Statistics Canada showed.

Europe

European industrial production dropped a more-than-expected 5.3% y/y in October, the largest decline since July 1993 as orders weakened, following September's downwardly revised 2.7% y/y drop, Eurostat reported. Industrial production declined a more-than-expected 1.2% m/m, following September's downwardly revised 1.8% m/m decline. Labor-cost growth accelerated to 4.0% y/y in Q3 from an upwardly revised 2.8% y/y in Q2, a separate report showed.

Asia-Pacific

Japan's final industrial production fell 3.1% m/m and 7.1% y/y, matching preliminary estimates for October, the Ministry of Economy, Trade and Industry said. Final capacity utilization for October was revised down to a 3.9% m/m decline versus a preliminary 1.6% m/m increase.

Japan's household consumer confidence dropped to a 26-year low in November, with the confidence index falling to 28.4, the lowest since records began in 1982, from October's 29.4, the Cabinet Office said. Consumer confidence including one-person households declined to 28.7 from October's 29.8.

FX Strategy Update EUR/USD USD/JPY GBP/USD USD/CHF USD/CAD AUD/USD EUR/JPY Primary TrendNegativeNeutralNegativePositivePositiveNegativeNegativeSecondary TrendNegativeNegativeNegativePositivePositiveNegativeNegativeOutlookNeutralNeutralNeutralNeutralNeutralNeutralNeutralActionNoneNoneSellNoneNoneBuyNoneCurrent1.337691.031.49461.17661.25030.6614121.76Start PositionN/AN/A1.7383N/AN/A0.6530N/AObjectiveN/AN/AN/AN/AN/AN/AN/AStop1.3260N/A1.5625N/AN/A0.5950N/ASupport1.300090.001.47001.15001.20000.6400115.001.240088.001.45001.10001.15000.6000110.00Resistance1.345093.001.55001.25001.30000.6800130.001.400096.001.60001.30001.35000.7000135.00

Hans Nilsson
Capital Market Services, L.L.C.
www.cmsfx.com

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