Expert Analysis of Today's Market

• The dollar was supported by safe-heaven flows on Tuesday. The yen, supported by continued carry-trade unwinding, was little changed against the dollar but rose against other key currencies on a spreading credit crunch. Sterling continued its sharp fall, testing support at the 2.00 level, after the UK July inflation was below forecasts and under the Bank of England’s 2% target rate for the first time in over a year. The Canadian dollar declined the most in more than 2 weeks and the Australian dollar fell to a 6-week low amid a spreading credit crunch.


• The EUR/USD broke support at 1.36 and hit a 6-week low on a Spanish press report that Banco Santander SA has more than €2 billion ($2.7 billion) of exposure to high-risk US loans and on weaker-than-forecast economic European growth. There is support from the rising trend-line at 1.35, but as long as the credit crunch continues, the EUR/USD is going to be pressured by speculation the European Central Bank will hold off another interest-rate increase. Our position stopped out today.

Financial and Economic News and Comments

US & Canada

• The US producer price index in July rose a stronger-than-expected 0.6% m/m and 4.0% y/y on strong gains in energy prices, after falling 0.2% m/m in June, the Labor Department reported. The July core PPI rose a lessthan- expected 0.1% m/m and 2.3% y/y, after rising 0.3% m/m in June.


• The US trade deficit narrowed 1.7% to $58.14 billion in June from May’s revised $59.16 billion, the Commerce Department said. Imports increased 0.5% as exports rose a strong 1.5%. Imported petroleum products showed declines in both price and quantity and made up about half of the decline. The lower deficit will boost the Q2 GDP revision.


• Canada’s trade surplus narrowed more than expected to C$5.27 billion ($5 billion) in June from C$5.87 billion in May, as exports fell a third straight month, Statistics Canada reported.


• Coventree Inc., the Toronto-based finance company specializing in securitization based financing, failed to sell asset-backed commercial paper because of a credit crunch, as lenders did not provide emergency funding for C$700 million ($661 million) of maturing debt. Coventree’s funds are among 17 asset-backed commercial paper issuers in Canada seeking emergency funding.

Europe

• The EMU economic growth slowed more than expected in Q2 as a rebound in consumer spending failed to make up for weakness in manufacturing and construction. The Q2 GDP rose 0.3% q/q and 2.5% y/y after a 0.7% q/q increase in Q1, the European Union’s statistics office said. The growth is the slowest since Q4 2004.


• Germany’s GDP growth slowed to a weaker-than-expected 0.3% q/q in Q2 from 0.5% q/q in Q1, Germany’s statistics office said. France, Spain and Italy’s expansions were also less than expected.


• The EMU industrial production declined 0.1% m/m in June and rose 2.3% y/y, according to a government report.


• The European Central Bank announced its fourth consecutive operation to supply money markets with sufficient funds and soothe investor concerns of a liquidity freeze. ECB President Jean-Claude Trichet called on investors to keep their composures amid a period of “market nervousness.” The ECB “will continue to monitor the situation whilst euro-area financial markets in general are going back to normal functioning,” Trichet said in a statement.


• UK’s inflation rate fell to 1.9% y/y in July, below the Bank of England’s 2% target for the first time since March 2006, weakening the case for another interest-rate rise.

Asia-Pacific

• Japan’s tertiary service index increased a more-than-expected 0.1% m/m in June, the Trade Ministry said. A 0.2% decline was expected.

FX Strategy Update