Japan Eyes SWF

Risk aversion was once again the primary theme on Friday, with EURUSD trading down to lows of 1.4660 from a high of 1.4730, while USDJPY traded down to a low of 106.73 from 107.83. Equity markets fell due to concerns over further credit losses among banks, with the S&P500 down by 1.6%, while the S&P financials index in particular fell by 2.5%. US Treasury yields also fell, with 2-years down by 12bp and the 10-years down by 14bp. The FOMC meeting on Wednesday will be the highlight of this week, followed by payrolls on Friday. Our economists forecast a 50bp rate cut from 3.50% to 3.00% and expect the Fed funds rate to be lowered to 2.25% by the end of Q2. With regards to the statement, we expect officials to again emphasize that "appreciable downside risks remain" and that "the Committee expects inflation to moderate in coming quarters." With regards to payrolls, last week's jobless claims confirmed the degree of the weakening seen in the employment report in December. However, our economists have slightly raised their estimate for the rise in nonfarm payrolls to 75k from 50k. It's a heavy data week and other notable releases include durable goods orders on Tuesday, GDP on Wednesday, Chicago PMI on Thursday, and manufacturing ISM and the final reading of the Uni of Michigan consumer sentiment index for January on Friday. We expect the US dollar to strengthen from current levels over a 3-month time horizon, as Fed rate cuts are priced in, we see downside risks to the European outlook and we also expect risk aversion to provide dollar-supportive flows. Ahead today, new home sales for December are due at 1500 GMT.

The focus today will likely be on how the Nikkei 225 trades in light of weakness in US stocks on Friday afternoon. On Saturday, UK newspaper The Times quoted Japan's Financial Services Minister Watanabe as saying that a high-level team was designing the operations of a sovereign wealth fund. The fund would initially invest in local stocks, which would be yen-supportive, but it is unknown at this stage how large the fund would be. It is difficult to envision the authorities announcing an allocation shift that would be large enough to drive speculation on further yen strength. On Friday, Japan's core consumer prices rose at their highest y/y pace in a decade in December, driven by rising energy and food prices. However, OIS markets are still pricing in 13bp of cumulative rate cuts over the next 12 months, reflecting market concerns about the impact of likely waning global demand on Japan's economy. Governor Fukui also pledged on Friday to keep monetary conditions accommodative considering the slowing economy. This week, the December jobless rate is due on Tuesday and industrial production on Wednesday. We see USDJPY remaining in a 105-110 range, and our underlying bias is for a test of the 105 boundary.

At 109 (cons. 109, previous: 109) French business confidence remained flat, while last month's result was revised down from 110 to 109. In Germany consumer confidence came in better than expected (last: 4.5, cons. 4.4, previous. 4.5). Our economists note that business confidence in the Eurozone was recently more resilient than generally expected, with the last ZEW survey results the single exception. In contrast, seasonally-adjusted Italian retail sales fell 0.3% m/m, the weakest result since April 2007. In other news, ECB's Liikanen highlighted today that the central bank has to stop second round effects from high commodity prices, and that next few months are significant in gauging the impact of a US slowdown on the Eurozone.

Canada's December CPI report, released Friday, showed relatively tame numbers. Headline CPI of 2.4% was in line with expectations while core CPI dipped to 1.5% from 1.6%, previously, below the expected 1.7%. With this month's tamer than expected core CPI tracking comfortably below the mid-point of the Bank of Canada's 1-3% target range, our economists expect the central bank will continue to lower the overnight rate target, cutting by another 25bp to 3.75% at the next meeting on March 4. It is a relatively light data week in Canada. GDP growth for November, due Thursday, is expected to be stable at 0.2% m/m. Our USDCAD one- and three-month forecast is 1.05.

In the holiday-shortened week in Australia, business confidence, due Tuesday, is important after easing below trend recently. Credit, out Thursday, could rise again due to business lending. A well respected journalist argued in the press that the RBA could deliver an additional two rate hikes in the coming months. Our economists are forecasting one more rate hike at the February meeting. Equity sentiment has rebounded in the sessions following the Fed's inter-meeting 75bp rate cut. Arguably, the AUD will be supported from rate differentials heading into the February RBA meeting. However, our global economics team have downgraded their global economic forecasts and the new Australian government is planning aggressive spending cuts. Hence, from an asset allocation perspective we remain negative on AUD. There may be opportunities for tactical longs in the near-term, but this would strictly be a short-term trade. The bigger moves in AUD are likely to be to the downside.

Payrolls Pressure Dollar

The US dollar weakened on Friday in response to a much softer than expected payrolls result. EURUSD traded up to a high of 1.4825 from a low of 1.4699, while USDJPY traded down to a low of 107.90 from 109.48. Recession fears were evident in the stock market, with the S&P500 down by 2.5%, while US Treasury yields fell by a further 7bp. The money markets are now pricing in 40bp of rate cuts at the Jan 30 FOMC meeting, and just over 140bp of rate cuts over the next 12 months. Non-farm payrolls for December were 18k vs. 115k in November and well below market expectations of 70k. As such, the unemployment rate rose to 5%, from 4.7% in November, and again much worse than consensus of 4.8%. The non-manufacturing ISM Survey dropped to 53.9 from 54.1, a little bit above market expectations of 53.5. On a more positive note, the Fed announced on Friday that it will auction $30bn of 28-day loans via the TAF on Jan 14 and $30bn of 28-day loans on Jan 28, rather than $20bn like in the previous two auctions. The TAF has been quite effective in driving down Libor spreads and reducing counterparty risk in the banking system.

It is a quiet data week in the US, which leaves little scope for markets to revisit prospects for Fed policy after the past week's weaker-than-expected data. In addition to Secretary Paulson's speech later today, there are several Fed speeches on the calendar next week. Fed Chairman Bernanke's speech on Thursday on the US economic outlook will be most closely watched. On the data front, pending home sales, due Tuesday, are expected to be down for November. Weekly jobless claims, out Thursday, are expected to stay elevated. Structurally, the trade deficit, due Friday, is expected to widen. On the political front, the New Hampshire primary looms on Friday, and the focus will be on whether Obama maintains him momentum against fellow Democrat rival Clinton. Our economists have revised their Fed funds rate outlook and now expect the FOMC to cut rates by 50bp at the Jan 30 meeting. As such, even greater than expected cyclical weakness in the US economy raises risks to our near-term EURUSD forecast of 1.45 over 1 month.

Ahead today, the Fed's Lockhart speaks at 1740 GMT on the economic outlook, while Treasury Secretary Paulson speaks at 1900 GMT on "Capital Markets and the Economy".

At 3.1% (cons: 3.1%, last: 3.1%), HICP flash for December released on Friday remained well above the ECB's 2% target. The development was mainly due to higher energy and food prices. Also, the composite PMI for the Eurozone fell to 53.3 in December (cons. 53.3, last: 54.1). The latest figure suggests that activity in Q4 will slow further. Composite input prices fell slightly, while output prices rose to its highest level since the middle of last year. Altogether, this suggests that inflation will remain at elevated levels in the near term. But going further, our economists note that although inflation remains above target, this should not cause the ECB to hike rates at their meeting on Thursday or in the coming months. Instead as growth slows below trend in the Euro zone this year, pressure on inflation to rise will subside until H2/2008. In consequence, the ECB is expected to start cutting rates in the second quarter 2008.

Swiss CPI hit its highest annual rate for 12 years. At 2.0% y/y (cons. 1.9%, last: 2.0%) the figure managed to beat market expectations. The increase was mainly due to heightened prices of imported goods. The release will likely keep the SNB concerned over price stability. At its October meeting, the central bank justified leaving rates unchanged by outlining that the medium-term inflation outlook had improved, while risks to the economy from last year's market turmoil remained unclear. Although inflation is still high, our economists continue to expect no policy steps by the SNB in the foreseeable future. The market's focus will now shift to next week's release of labour data, which continued to show strength in the last few months. Going further, the franc remains highly dependent on risk sentiment, and according to our risk index analysis equity volatility remains one key driver. As such we continue to closely follow equities in order to evaluate the Swiss currency. If risk aversion stays high as it currently is then EURCHF will keep trending lower in the short term. Our three month target for the cross is 1.60.

Australia's largest bank, the National Australia Bank, announced last week that it had increased its variable mortgage rate by 0.12%. This increases the odds that other major banks will follow suit, as they pass on the higher global funding costs on to the borrower. The RBA is unlikely to be surprised by this latest development, but it does reduce the need for the RBA to tighten further. Indeed at the December RBA meeting, the minutes show that they would assess at the February meeting whether the combination of policy action and market conditions would be sufficient to constrain inflationary pressures. The OIS market is now pricing in just 8.5bp of tightening at the February meeting, versus around 12bp prior to this latest development. In New Zealand, the trade balance for November was released this morning and came in with a larger than expected deficit at NZ$656mn. However, this was smallest deficit in 18 months.

Personal credit ratings

In the United States, an individual's credit history is compiled and maintained by companies called credit bureaus. Credit worthiness is usually determined through a statistical analysis of the available credit data. A common form of this analysis is a 3-digit credit score provided by independent financial service companies such as the FICO credit score. (The term, a registered trademark, comes from Fair Isaac Corporation, which pioneered the credit rating concept in the late 1950s.)

An individual's credit score, along with his or her credit report, affects his or her ability to borrow money through financial institutions such as banks.

In Canada, the most common ratings are the North American Standard Account Ratings, also known as the "R" ratings, which have a range between R0 and R9. R0 refers to a new account; R1 refers to on-time payments; R9 refers to bad debt.

The factors which may influence a person's credit rating are:^[1]

• ability to pay a loan
• interest
• amount of credit used
• saving patterns^{[not in citation given]}
• spending patterns
• debt

Short term rating

A short term rating is a probability factor of an individual going into default within a year. This is in contrast to long-term rating which is evaluated over a long timeframe.

Credit rating agencies

Credit scores for individuals are assigned by credit bureaus (US; UK: credit reference agencies). Credit ratings for corporations and sovereign debt are assigned by credit rating agencies.

In the United States, the main credit bureaus are Experian, Equifax, and TransUnion. A relatively new credit bureau in the US is Innovis.

In the United Kingdom, the main credit reference agencies for individuals are Experian, Equifax, and Callcredit.

In Canada, the main credit bureaus for individuals are Equifax, TransUnion and Northern Credit Bureaus/ Experian.