• The dollar declined versus most key currencies on Wednesday as the December 15-16 FOMC meeting minutes, released today, showed FOMC members expect a slow economic recovery with subdued inflation and weak labor markets. The members discussed whether inflation or deflation was the biggest risk. The Fed, in a unanimous decision, maintained the key interest rate target between 0 to 0.25%. The ISM US nonmanufacturing index edged into expansion territory. ADP forecast an 84K decline in December US nonfarm private employment. The S&P 500 increased 0.62 to 1,137.14. The yen fell against all major currencies. Japan’s Vice PM Naoto Kan took over as finance minister. The euro rose. The eurozone services PMI increased slightly less than estimated and industrial new orders declined more than expected. Greece said it does need any bailout. Sterling rose despite weakening UK consumer confidence. The Australian and Canadian dollars rose, supported by strong commodity prices.
• The dollar index fell, pressured by the news that the FOMC discussed increasing and extending asset purchases should the US economy be weakening. This increased speculation US interest rates will stay low longer than expected. However, a better-than-expected job report this Friday may change this perception. The Fed is unlikely to tighten its monetary stance unless the labor market improves; thus, better-than-expected employment data will increase bets on an earlier Fed exit strategy. The dollar index is consolidating its December gains between support at the 77 handle and resistance in the low 78 area.

Financial and Economic News and Comments

US & Canada

• US private-sector payrolls declined 84,000 in December, the fewest since March 2008, according to estimates by Automatic Data Processing, Inc. and Macroeconomic Advisers, LLC. However, the 84,000 decline was deeper than forecast. November data was revised to show a decline of 145,000, down from a previous estimate of 169,000. The ADP has overestimated the job losses since May. We believe a January 8 employment report from the Labor Department may show overall job gains approximately 20,000 with the unemployment rate unchanged at 10.0%.

• The ISM US non-manufacturing index increased to a lower-than-expected 50.1 in December from 48.7 in November, indicating US service industries expanded for the third time in four months, data from the Institute for Supply Management showed. All of the major sub-indexes were either up or above the 50 expansion mark in December. The business activity index rose to 53.7 from 49.6; the new orders index declined to 52.1 from 55.1; and the supplier deliveries index grew to 50.5 from 48.5. The employment index rose to 44.0 from 41.6, indicating improving labor conditions. The prices paid index increased to 58.7 in December from 57.8 in November.

Europe

• Eurozone industrial new orders fell a more-than-expected 2.2% m/m in October, the largest decline since January 2009, after an upwardly revised 1.7% m/m gain in September, according to data from Eurostat. October industrial new orders fell 14.5% y/y, easing the pace of decline from a revised 16.3% y/y September drop.

• Eurozone producer prices increased 0.1% m/m November after an upwardly revised 0.3% m/m advance in October, according to PPI data released by Eurostat. November PPI declined 4.4% y/y, an eleventh year-onyear fall, following October’s revised 6.6% y/y decrease.

• The eurozone composite PMI increased to an unrevised 54.2 in December from 53.7 in November, final December PMI data from Markit Economics showed, indicating Europe’s service and manufacturing industries expanded to the highest level since October 2007. The services PMI advanced to 53.6 (vs. previously reported 53.7), the highest level since November 2007, from November’s 53.0.
• The German services PMI rose to 52.7 in December (vs. previously reported 53.1) from 51.4 in November, final December PMI data from Markit Economics showed, indicating the services sector in Germany expanded to the highest level since August 2009.
• The CIPS/Markit UK services PMI increased to 56.8 in December from 56.6 in November, showing the UK services sector expanded for an eighth consecutive month at a faster pace, according to data from the Chartered Institute of Purchasing and Supply and Markit Economics.
• The Nationwide UK sentiment index declined to a lower-than-expected 69 in December from an upwardly revised 74 in November, indicating UK consumer confidence fell by the most since November 2008, according to data from Nationwide Building Society. Consumer expectations in the next six months for the economy deteriorated, with the economic expectations index falling to 101 from 109.
• UK shop prices grew 2.2% y/y in December after a 0.2% y/y increase in November, the British Retail Consortium reported. Food prices climbed 3.7% y/y while non-food prices increased 1.4% y/y.

Asia-Pacific

• Australia’s seasonally adjusted building approvals increases a more-than-expected 5.9% m/m to 13,724 in November after a revised 1.8% m/m decline in October, according to data from the Australian Bureau of Statistics. November building approvals rose 33.3% y/y. Approvals to build private houses declined 1.9% m/m to 9,386 in November after ten consecutive monthly increases. Approvals for apartments and renovations climbed 27.5% m/m to 3,404 following October’s decline.

FX Strategy Update

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