USD and JPY Gain on Worst Stock Rout since 1930s

The dollar rose against most major currencies Friday. The yen fell modestly and other key currencies cut losses after US stocks partly recovered from steep losses on hopes that the G-7 will take coordinated steps this weekend to confront the global financial crisis. The Australian and Canadian dollars dropped as commodity prices plunged. Our long Australian dollar stopped out with a small loss, but our short Canadian dollar position gained as the loonie suffered one of the biggest weekly and daily declines ever. Sterling fell modestly but managed to stay above support at 1.70.

The EUR/USD fell for the week following the deepening global credit crunch and the worst US stock market route since 1930s. Investors are fleeing risky assets. The pair broke the 1.35 support today and fell to a multimonth low of 1.3258 before paring losses. The pair is in a strong downtrend. The asset implosion and deleveraging will likely continue to pressure the EUR/USD. There are supports in the 1.32 and 1.30 areas. Minor resistance is at 1.35 and significant resistance is at 1.39-1.40.

Financial and Economic News and Comments

US & Canada

The US trade deficit in goods and services fell 3.5% to $59.14 billion in August, following July's revised $61.31 billion deficit, the Commerce Department said. Exports declined 2.0%, the biggest decline in four years, to $164.7 billion. Imports fell 2.4% to $223.9 billion, mainly reflecting the decline in oil.

US import prices fell 3.0% m/m in September, the largest drop since April 2003, data from the Labor Department showed. Petroleum import prices tumbled 9.0% m/m; prices excluding petroleum declined 0.9% m/m. Export prices declined 1.0% m/m. Import and export prices rose 14.5% y/y and 6.8% y/y, respectively.

Canada's employment increased 106,900 in September, the biggest one-month employment gain in at least 30 years and more than 10 times as the expected, following August's 15,200 gain, data from Statistics Canada showed. The unemployment rate remained at 6.1%. Canada added 276,800 workers since September 2007, a 1.6% y/y increase. The employment gain will possibly help Conservative Party Prime Minister Stephen Harper for the October 14 election.

Canada's trade surplus rose to $5.8 billion in August from $4.2 billion in July, Statistics Canada said. Imports fell 5.8% to $37.3 billion in August, the first decline since March 2008 and the largest percentage drop since December 1991. Exports decreased 1.6% to $43.1 billion, the first drop since December 2007.

Canada's new housing prices were unchanged m/m in August, with the new housing price index remaining at 158.6, Statistics Canada reported. Housing prices rose 2.3% y/y in August compared with 2.7% y/y in July. Regionally, housing prices rose at the fastest pace in St. John's with a 23.7% y/y increase.

In a bid to ease higher borrowing costs that have crippled lending, Canada Mortgage and Housing Corp., a government-run agency, will buy as much as C$25 billion ($21.6 billion) in mortgages from the banks, Finance Minister Jim Flaherty said.

Europe

Germany is working on a plan to recapitalize its major banks that could include taking government stakes and measures to guarantee banks' access to liquidity. No final decision had been taken yet, but Chancellor Angela Merkel's government could take a decision on the plan and announce it as early as this weekend.

European Central Bank council member Christian Noyer said the ECB's decision to offer banks unlimited cash in its money market operations may “dramatically” improve confidence in the European banking system. “I do hope that once it is fully understood and proven its effects, it will change dramatically and decisively the mood in the money market,” Noyer said on Bloomberg Television. “It's a very powerful decision that the ECB has taken.”

Asia-Pacific

Foreign direct investment in China rose 39.9% y/y in the first nine months of the year and spending by overseas companies climbed to $74.4 billion, the Ministry of Commerce said.

Yamato Life Insurance Co., a 98- year-old Japanese insurer, filed for bankruptcy in Japan's first bankruptcy in the industry in seven years, with debts exceeding assets by ¥11.5 billion ($116 million). Yamato's collapse is the eighth by a Japanese life insurer since World War II, and the fifth largest this year, according to Teikoku Databank Ltd.

FX Strategy Update

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

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