Dollar continues to strengthen

We believe that the all time highs now seen in EURUSD is very likely the top looking into 2008. Today's US Current Account could provide further support.

MAJOR HEADLINES – PREVIOUS SESSION
Friday's data highlights

• German CPI MoM/YoY (Nov F) out at 0.5%/3.1% vs. 0.4%/3.0% expected.
• EU25 New Car Registrations (Nov) out at -1.3% vs. 5.3% prior.
• Bank of France Business Sentiment (Nov) out at 105 vs. 107 expected.
• E-Z CPI MoM/YoY (Nov) out at 0.5%/3.1% vs. 0.5%/3.0% expected.
• E-Z CPI Core YoY (Nov) out at 1.9% vs. 2.0% expected.
• US CPI MoM/YoY (Nov) out at 0.8%/4.3% vs. 0.6%/4.1% expected.
• US CPI Core MoM/YoY (Nov) out at 0.3%/2.3% vs. 0.2%/2.3% expected.
• Canadian Capacity Utilization Rate (3Q) out at 82.7% vs. 82.5% expected.
• US Capacity Utilization (Nov) out at 81.5% vs. 81.7% expected.
• JN Tertiary Industry Index MoM (Oct) out at 1.1% vs. 1.2% expected.
• UK Rightmove House Price MoM/YoY (Dec) out at -3.2%/4.8% vs. -0.7%/7.9% expected.
• AU Dwelling Starts (3Q) out at 1.3% vs. -2.5% prior.

Today's European data highlights

• SZ Industrial Production Q3, out at 0.0% vs -2.2% exp. YoY out at 10.7% vs 8.0% exp.
• EC PMI Manufacturing Dec, out at 52.5 vs 52.3 exp.
• EC PMI Services Dec, out at 53.2 vs 54.0 exp.
• EC PMI Composite Dec, out at 53.3 vs 53.7 exp.
• NO Trade Balance Nov, out at 31.3B vs 25.0B exp.
• JN Coicident Index Oct, out at 70.0% in line with exp.
• JN Leading Economic Index Oct, out at 18.2% in line with exp.

We had a quiet Asian session in FX, but Friday's theme of a stronger dollar supported by US inflation figures saw EURUSD taking out the lows in Europe.  A good way of visually getting the idea of how much the dollar is running the currency markets is looking at EURJPY and USDJPY on day to day basis over the last week. Both are carry trades and has shown significant correlation looking at 2007. But this has all changed since the sharp sell-off from the all time highs in late November, which goes well with our 2008 theme which consist of an overvalued EUR against the USD and especially the JPY and CHF.

THEMES TO WATCH – UPCOMING SESSION
Our EURUSD theme for 2008 has begun!!!

With liquidity being thin and many banks/funds closing their books in December, the move in EURUSD has been a bit of its mean, but we don't think that changes the fact that USD strength is here to stay. Last weeks' figures showed inflation picking up in late 2007 especially headline. We still are trying to understand why so many central banks has choosing to look so lightly on headline inflation. Food prices and energy prices has been rallying through this year which we expect to repeat itself through 2008, which should give reason to believe that Central banks will change their present "wording" especially the Fed, which should leave rate elevated through the upcoming year. For the short term the US current account deficit is out later today for Q3 and with the TWI USD index dropping more than 4.0% in Q3 we expect this CA deficit to come out better then expected then the consensus of -$183.0B, which should ceteras paribus make the dollar stronger and send EURUSD offered and possibly a break of the lows seen in the European trading session.

3-6 month risk reversals in EURNOK looks attractive
We continue to favor the Scandies NOK and SEK and we think the set-up looks ready to start putting money back into the Norwegian Krona. Norges Bank hiked rates to 5.25% last week and still believe that yield differentials will favor NOK going into 2008. On top of that we think that oil will remain bid and with an unemployment rate below 3.0% this is country that looks solid going forward. From a technical perspective a close below the 7.93-50 support which consist of the lows from last week along with 38% fibo (from 7.6240-8.1500) should give scope for accelerated downside going forward. This could also be looked to be played against the pound.