• The dollar traded mostly lower on Thursday. The US trade deficit unexpectedly declined and China’s inflation rose more than expected. Declining US imports and exports sparked concerns over the global economic recovery and the higher Chinese inflation increased fears about another tightening move by the People’s Bank of China. The S&P 500 rose 4.63 to 1,150.24, the highest level since October 2008. The yen was little changed. Japan’s Q4 2009 GDP was revised lower. The euro advanced for a second day on optimism about the Greek austerity program. Sterling rose. The Bank of England’s inflation survey showed inflation expectations in the UK rose to a 2-year high. The AUD/USD gained modestly despite weaker-than-expected Australian employment.
• The USD/CAD was supported by falling US imports and a possible Chinese monetary tightening. However, the pair pared gains on Canada’s strong economic data. Canadian new housing prices, trade surplus and capacity utilization all improved. On March 2, the Bank of Canada downgraded the risk for deflation and saw stronger economic growth. This has increased bets the inflation-targeting BOC will raise rates ahead of the Federal Reserve. Technically, the USD/CAD is testing the 1.02-area support for the third time since October. If this support holds, the pair will form a triple bottom. The USD/CAD oversold condition together with the possible triple bottom should lead to a short-term rally.

Financial and Economic News and Comments

US & Canada

• The US trade deficit unexpectedly narrowed 6.6% m/m to $37.3 billion in January from a revised $39.9 billion deficit in December, figures from the Commerce Department showed. Imports fell 1.7% m/m to $180.0 billion in January, the first fall in five months, led by lower imports of crude oil and autos/parts. The decrease in oil imports was due to lower volume; the price per barrel increased slightly. Exports slipped 0.3% m/m to $142.7 billion, the first decline in nine months, led by fewer shipments of aircraft and autos/parts.

• US initial jobless claims in the week ending March 6 declined 6,000 to 462,000 from the previous week’s downwardly revised 468,000, according to figures from the Labor Department. The 4-week moving average increased 5,000 to 475,500. Continuing claims in the week ending February 27 rose 37,000 to 4,558,000 from the preceding week’s upwardly revised 4,521,000. The 4-week moving average of those continuing claims was 4,581,000, unchanged from the preceding week’s upwardly revised 4,581,000. The insured unemployment rate for the week ending February 27 was unchanged at 3.5%.

• US household net worth rose by $0.7 trillion to $54.2 trillion in Q4 2009 after rising by $2.78 trillion in Q3, registering a third straight gain, according to the Federal Reserve’s Flow of Funds report. For 2009 as a whole, household net worth grew $2.8 trillion.
• The Canadian trade surplus widened more than anticipated to C$799 million ($780 million) in January from an upwardly revised C$75 million in December, figures from Statistics Canada showed. Exports rose 0.5% m/m to C$33.0 billion in January, the slowest rise in five months, while imports declined 1.7% m/m to C$32.2 billion, led by a 5.6% m/m decrease in energy products.
• Canada’s industrial capacity utilization increased to a higher-than-expected 70.9% in Q4 2009 from an upwardly revised 68.7% in Q3, registering the second consecutive gain following nine straight drops, according to data from Statistics Canada.
• Canadian new housing prices advanced as forecast 0.4% m/m in January, the same pace for a third straight month, data from Statistics Canada showed. January new housing prices increased 0.1% y/y, the first year-over-year gain since December 2008, following a 0.9% y/y December decrease.

Europe

• Switzerland’s central bank maintained the 3-month Libor target rate at 0.25%, as forecast. “The Swiss National Bank is maintaining its expansionary monetary policy,” the bank said in today’s monetary policy statement, and reiterated that “it will act decisively to prevent an excessive appreciation of the Swiss franc against the euro.”

Asia-Pacific

• Japan’s GDP grew at a 3.8% q/q annualized rate (vs. preliminarily reported 4.6% q/q) in Q4 2009, the second expansion in three quarters, final Q4 GDP data from the Cabinet Office showed. The Q4 GDP grew 0.9% q/q (vs. initially reported 1.1% q/q). The Q4 GDP declined 1.0% y/y. The GDP deflator fell a record 2.8% y/y (vs. preliminarily reported -3.0% y/y).

• Australia’s median expected inflation rate was unchanged at 3.2% in March, but the proportion of consumers expecting inflation to be within the Reserve Bank of Australia’s 2-3% band fell to 18.6% from February’s 21.7%, suggesting more consumers expect upward inflationary pressures, according to the latest Melbourne Institute survey of consumer inflationary expectations.
• Australian seasonally adjusted employment grew a less-than-expected 400 in February, the fewest increase in six months, to 10,971,100, after an upwardly revised 56,500 gain in January, figures from the Australian Bureau of Statistics showed. The unemployment rate increased to 5.3% from January’s downwardly revised 5.2%. Full-time employment rose 11,400 to 7,659,700 in February, a sixth consecutive monthly rise, registering the longest stretch of gains since 2006. Part-time employment fell 11,000 to 3,311,400. The participation rate declined to 65.2% in February from 65.3% the prior month.
• China’s consumer-price inflation rate rose to 2.7% y/y in February, the fastest rate in 16 months, from 1.5% y/y in January, the Statistics Bureau said. The producer-price inflation rate accelerated to 5.4% y/y from January’s 4.3% y/y. Industrial production climbed 20.7% y/y ytd in February, the largest gain in more than five years. Banks extended 700 billion yuan ($103 billion) of new loans in February, compared with 1.39 trillion yuan in January and 1.07 trillion yuan a year earlier, according to figures from the People’s Bank of China. M2 rose 25.5% y/y in February after rising 26.0% y/y in January. Retail sales grew 17.9% y/y ytd in February, and urban fixed-asset investment advanced 26.6% y/y ytd.

FX Strategy Update

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