Carry-Trade Unwinding Supports Yen

The dollar fell against most major currencies on Friday but pared some of its losses after a government report showed the US trade deficit narrowed more than forecast. The yen and Swiss franc benefited from increased risk aversion, as credit-market losses by America international Group Inc. spurred investors to sell higher-yielding assets funded in yen and Swiss franc. The Canadian dollar advanced on better-than-expected employment growth and higher energy prices as crude oil crossed $125 per barrel. The Australian dollar fell on increased risk aversion as traders sold high-yielding currencies.

The GBP/USD fell on a rising UK home repossession as well as renewed global credit concerns after American International Group Inc. said it needs to raise $12.5 billion to cover writedowns. The pair is at the lowest level since February on speculation the Bank of England will cut interest rates further as the UK economy slows. The pair is likely to test the 1.94-handle support next week. There is resistance in the 1.96-area.

Financial and Economic News and Comments

US & Canada

The US trade deficit narrowed 5.7% to $58.21 billion in March, as imports fell the most in six years on a weak US economy, following a downwardly revised $61.71 billion deficit in February, the Commerce Department said. Imports fell 2.9% m/m to $206.7 billion. Imports are up 7.9% y/y. The drop in imports in March was primarily due to petroleum and autos. Purchases of crude oil dropped, even as the average price for the month rose to a record. Exports fell 1.7% m/m to $148.5 billion, as sales of commercial aircraft, autos and petroleum products declined. Exports are up 15.5% y/y.

Canada's trade surplus rose to C$5.5 billion in March from C$4.8 billion in February, the third consecutive increase and the highest level since May 2007, the Canadian national statistics agency said. Exports rose for the third consecutive month to C$40.1 billion in March from C$39.4 billion in February, while imports decreased slightly to C$34.5 billion from C$34.6 billion.

Canada's employment rose a more-than-forecast 19,200 in April, and the unemployment rate rose to 6.1% in April, the highest in almost a year, from 6.0% in March, Statistics Canada said.

Europe

UK home repossession claims by mortgage lenders rose 16% y/y to the highest since the early 1990s. Home possession claims, the first step in the foreclosure process, climbed to 38,688 in Q1 2008, the Ministry of Justice said. Repossession orders issued by courts rose 17% y/y to 27,530 and were 9% higher than in Q4 2007.

Germany's wholesale prices rose 0.6% m/m and 6.9% y/y in April, the Federal Statistics Office said. April's yearly inflation rate eased slightly to 6.9% from March's 7.1%.

Asia-Pacific

Japan's leading economic index fell to 94.2 in March from 96.5 in February, while the diffusion component fell to 20 from 54.5, the Cabinet Office said. The coincident index fell to 111.0 in March from 113.4 in February, while the diffusion component fell to 33.3 from 70. The figures indicate the Japanese economy is slowing and may slide into a recession.

China's export slowed to 21.8% y/y in April from 30.6% y/y in March, the Ministry of Commerce said. The trade surplus rose to a stronger-than-expected $16.8 billion, compared with $16.7 billion a year earlier. Imports rose 26.1% y/y in April after gaining 24.6% y/y in March.

Chinese producer prices rose 8.1% y/y in April, the fastest pace in more than three years, the statistics bureau said.

The Reserve Bank of Australia raised its forecasts for inflation for 2008 and 2009 and trimmed its outlook for economic growth. The RBA said in its quarterly policy statement there are "evidence that demand has slowed, but it will take time for this to have a substantial impact on inflation.'' The RBA forecast inflation will peak at 4.5% late this year, higher than the 3.5% forecast in February and reduced its forecast for growth in June 2009 to 2.75% from the 3% predicted in February. The RBA's board "judged that the setting of monetary policy was appropriate for the time being," at its May 5 meeting, today's report showed.

FX Strategy Update

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

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