The strong dollar policy will not likely help exports, but it can certainly enhance imports and support of other economies as USD's find their way to other regions. He also signalled another departure from previous policies when he said President Obama believes China is manipulating its currency and would seek aggressive policy changes on that front. That's a nice deflection of the focus off his own illegal tax evasion story. The strong dollar position is reminiscent of the Treasury policy in the 1990s but it remains to be seen what new policy the administration would adopt towards China. Economic data was also weak again, with weaker than expected housing starts, building permits and jobless claims. Importantly, yesterday's jobless claims release was equal to the pre-Christmas seasonally messy high for this cycle suggesting the worst is still to come on the jobs front. And with a number of analysts waiting for a peak in jobless claims as being the first condition for an eventual economic base, bad news on the real economy is likely to continue for some time yet. The US dollar likes the bad news, because it keep assets from chasing risk investments and has nothing to do with a "strong dollar policy," rather a consequence of market forces responding to global economic ills. Buy dollars, but not because a crook has stated a strong dollar policy.

With no sign of a sustainable improvement in risk sentiment, we expect the USD to remain supported. Global downside risks to growth remain and other central banks continue to follow the Fed on the path of aggressive, unconventional policy tools. Uncertainty will keep investor demand for the greenback elevated as new fiscal and monetary policy are implemented, which should also be supportive to the dollar. However, we may see a temporary pull back from current levels, i.e. 1.2800 EUR/USD.


EUR: Economic slowdown continues
EUR remains under pressure as German and Eurozone PMIs remained near their lows. German manufacturing and services PMI met expectations at 32.0 and 45.4, respectively, while Eurozone PMIs slightly exceeded expectations (manufacturing 34.5 vs. consensus 33.1, services 42.5 vs. consensus 41.5, composite 38.5 vs. consensus 37.4). The French business confidence indicator also remained low at 73 (consensus 70, prior 73). Despite recent downgrades in sovereign credit ratings for several Eurozone countries and an outlook that an economic recovery will not come before 2010, ECB president Trichet rejected a call from Chris Lori who suggested more weak links in the Eurozone will emerge, such as, (Spain, Portugal), Ireland, Italy and Greece (subject to downgrades and a call to question the EMU) and nixed the idea of any country abandoning the euro and he shifted the onus to fiscal policy actions by individual member nations to stimulate long-term growth and job creation. Chris had noted earlier to Pro Traders Club members that weak links in the Eurozone would drag down the Euro as the market calls to question the sustainability of the region as a monetary union. New industrial orders came in poorer than expected falling by 26.2%y/y (cons. -20% and prev. -15.1%) and provide further evidence of a sharp deterioration in economic activity. Meanwhile the ECB, in its monthly bulletin, recognised that the Eurozone economy is experiencing "a significant downturn" and global and Eurozone demand is likely to remain subdued for a "protracted period." They also noted that uncertainty in the current environment was "exceptionally high". The bulletin echoed recent marks by ECB-President Trichet by calling for "prudence" in the implementation of fiscal stimulus packages across member states.
Look for more EUR weakness in 09 and don't be surprised when we are trading at much lower levels in H2.


GBP: GDP disappoints
The poor economy continues to weigh on sterling as Q4 GDP was -1.8%y/y (consensus -1.4%, prior 0.3%), the lowest reading since 1991. On a quarterly basis, it was the largest quarterly drop since 1980. The UK is now in a technical recession if that's not already a surprise, based on the two consecutive quarter definition, for the first time in 16 years. Chancellor of the Exchequer Darling said the downturn was sharper than expected and cited global volatility across all markets and a slowing in trade in particular. Despite missing expectations, economists expect the intensity of the economic slowdown to moderate if the Q4 data turns out to have been disproportionately impacted by inventories. Retail sales helped cushion the poor GDP data as they beat expectations. We still expect another BoE cut of 50bp in February following the GDP data. Following sterling's heavy fall against the euro, France's Finance Minister proposed that the BoE should do more to support the currency. Geez, maybe they can employ a strong pound policy. In contrast, the BoE has consistently maintained that a weaker pound will help the UK gradually adjust its balance of payments position and contain the effects of the global economic slowdown. Currency strength for the BoE is undesirable in an environment where monetary policy is required to be aggressively loosened. A source within the G7 said the sterling will feature on the agenda of the next G7 meeting, where the UK could be pressured to support the pound in a bid to assist exporters from the other member nations. However, as the G7 recently allowed Japan to act unilaterally last year, we do not expect a joint statement or communiqué to come out of the meetings. While we remain cautious with GBP given the severity of its recent decline and noise from various commentaries, we continue to target EURGBP lower from current levels.


CAD: BoC not done yet
The CAD should remain under pressure as the BoC kept the door open for further monetary policy action in its latest Monetary Policy Report. The recent CPI data release was below expectations (1.2%y/y, consensus 1.3%, prior 2.0%), which could encourage further easing. Governor Carney maintained that the BoC would continue to monitor economic and financial developments as they judge how much more monetary stimulus would be required to achieve 2% inflation over the medium term. As of now, they expect inflation to come back to their target by mid-2011. Retail sales for November were -2.4%m/m from -0.9% previously. The BoC also noted that the economy would shrink by 1.2% this year, though they see the Canadian economy recovering faster from this recession versus previous episodes. But even as Canadian officials reiterate the better position that the Canadian banks and economy are in relative to other countries, Canada will still be adversely affected by the global slowdown and is projected to run its first budget deficit in over a decade as a stimulus plan is likely forthcoming. Finance Minister Flaherty said the government would look to inject capital into the banking system if needed, which brings more attention to the resumption of Parliament next week. We maintain our forecast of 1.30 in 3m for USDCAD.

Tags: USD