FX Update

Major Markets

The USD is a bit stronger across the board, with the exception of the yen, but with very little real data to support the move. In US data out today, for Q3, mortgage delinquencies are out 9.6% of all loan outstandings, 4.7% of loans are in foreclosure. Prime fixed rate loans for the first time surpassed sub-prime loans in growth of delinquencies. The US Philly Fed index for November is up a bit more than expected at 16.7 (12 expected). Leading indicators are up small, in line with expectations (all the components are pretty well known before the release). Weekly jobless claims came in at 505K, in line with expectations. Today's actions seem to be a pure "risk-off" move -- equities are down, bond yields are down, USD up, etc.

Yesterday's poor housing news has given the equities a shake to wake up a bit and see that data is not running all that well. Over this week some of the analysts we follow mention that high and persistent unemployment will be the most defining factor of economics and politics (election year) in 2010. Every year at this time, markets and businesses get into planning mode for the next year. For what it is worth, the OECD (Organization of Economic Cooperation and Development) today released a forecast of US GDP up +2.5% next year after an estimated contraction of 2.5% this year. For 2011, the OECD sees US GDP at +2.8%. The report also stated that the OECD expects US monetary policy to remain on hold for most of 2010 and forecasts a Fed funds rate of 2.25% by the end of 2011. The OECD expects euro zone GDP to contract by 4.0% this year and rise modestly to 0.9% for 2010 and +1.7% by 2011. For the UK, the OECD expects a 4.7% contraction for this year and a +1.2% rise for 2010 and a +2.2% GDP growth rate for 2011. The report also expects the ECB and Bank of England to remain accommodative for most of 2010. While the report is a bit more pessimistic that other forecasts on the euro zone and UK in particular, it highlights the overall pessimistic view that observers see in terms of the global outlook for 2010. As a reminder, our house view is that the dollar is still vulnerable as we are more convinced that the Fed will keep rates low for its stated "extended period" and the US fiscal position continues to require more external financing. That said, short-term technical factors will likely exert a lot of influence here in the short-term. In particular, several analysts are noting the US dollar index has formed a significant base above the 75 level, and currently stands at 75.50. That could at least form a stabilized base for the speculative crowd. Finally, for those of you with euro exposures in particular, December has traditionally been a strong month for the currency for a few years now. Something to keep in mind.

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