Yen Falls As Risk Aversion Decreases

The dollar rose against the euro and yen on Monday as President-elect Barack Obama is seeking a largerthan- expected 300 billion in tax cuts and US construction spending dropped less than expected. The yen fell after breaking important technical levels despite lower US stocks. The recent narrowing of credit spreads and announced large US stimulus limit the downside for the economy and reduce investors' risk aversion. The euro, yen and Swiss franc were the weakest today. Sterling rallied against the euro and rose modestly against the greenback as the Bank of England announced a plan to expand its lending facilities. The Canadian dollar advanced as crude oil rose for a third day on speculation that the conflict in the Gaza Strip may spread and disrupt oil supplies from other parts of the Middle East. The Australian dollar extended last week's gains as improved risk appetite boosted demand for high-yielding assets.

The EUR/USD fell to a 3-week low on increased European Central Bank rate-cut speculations. Lucas Papademos, ECB Vice President, said over the weekend that more ECB rate cuts might be needed to stimulate the European economy. Reports today of weaker-than-expected Italian and Spanish inflation data also support rate-cut speculations. After breaking the 1.39 support, the EUR/USD is testing the 1.35 support. If this support is broken, the pair will likely fall to the 1.30-area.

Financial and Economic News and Comments

US & Canada

• US construction spending declined a less-than-expected 0.6% m/m in November, following October's upwardly revised 0.4% m/m decline, Commerce Department data showed. Private residential construction spending fell 4.2% m/m in November, the most since July, following October's 2.1% m/m decline. Non-residential construction rose 1.0% m/m from October's 0.5% m/m increase.
  

Europe

• European investor confidence increased for the first time in seven months, with the eurozone Sentix investor sentiment rebounding to -34.4 in January, the steepest increase since August 2005, following December's record low of -42.3, the Sentix research institute reported. The expectations index improved to -31.5 from December's -42.0. The current business conditions index increased to -37.25 from -42.5.
  

• UK building activity continues to deteriorate in the dire state of the UK housing market, with the construction PMI index declining to 29.3 in December, the lowest reading since recordkeeping began in 1997, from 31.8 in November, the Chartered Institute of Purchasing and Supply and NTC Research reported.
• The Swiss Schweizerischer Verband für Materialwirtschaft und Einkauf (SVME) PMI increased to 36.9 in December after falling to 35.2 in November, Credit Suisse reported.

Asia-Pacific

• Australian hedge funds will lower fees in 2009 amid poor performance and rising redemptions, the Australian Financial Review reported.
• China's economy, supported by the government's 4 trillion yuan ($586 billion) stimulus package, will grow about 8% in 2009, said Huang Yiping, Citigroup's chief Asia Pacific economist.
  

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

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