Expert Analysis of Today's Market

• The yen rose across the board on Thursday, reaching its highest against the dollar since June 2006 and since March 2007 versus the euro, as investors liquidated carry trades and risky global assets plunged. The dollar rose against other key currencies on safe haven flows into US government papers. Today’s US economic data were weaker than expected but had little relevance for a market in turmoil. The data may hasten some action from the Federal Reserve, despite St. Louis Fed President William Poole’s statement on the contrary.


• The AUD/JPY fell over 7% today, down about 12% on the week, as investors unwound carry trades in a panicky fashion. Investors fled the carry trades after global stocks fell and mortgage companies in Australia and Canada sought emergency funds because they were unable to refinance debts. A panic selling like this is usually a sign of a bottom. The carry trades have been building for a long time, so it may not be over yet. However, there is possible support at these levels.

Financial and Economic News and Comments

US & Canada

• US housing starts plunged 6.1% in July to a seasonally adjusted 1.381 million annual rate, after rising 2.1% in June to 1.470 million, the Commerce Department said. July’s housing starts were well below expectations and the lowest in over a decade. Building permits declined 2.8% in July to a 1.373 million annual rate, after falling 7.0% in June to 1.413 million. The numbers indicate no sign of a turnaround in the housing sector and construction will continue to be a drag on the US economy.


• The Federal Reserve Bank of Philadelphia’s general economic index dropped more than expected to 0.0 in August from 9.2 in July, indicating the manufacturing activity in August is neither stronger nor weaker than in July.


• US initial jobless claims rose 6,000 to 322,000 on a seasonally-adjusted basis in the week ended August 11, the Labor Department said. The 4-week average rose 4,750 to 312,500. Continuing claims rose 17,000 to 2,567,000.


• William Poole, President of the St. Louis Federal Reserve Bank, downplaying the need for an interest-rate cut overnight, said the subprime mortgage trouble has not spread into the real economy.


• Treasury Secretary Henry Paulson said the turmoil “will extract a penalty on the growth rate” of the US economy. However, he expressed confidence that “the economy and the markets are strong enough to absorb the losses” without provoking a US recession.


• The Chicago Mercantile Exchange raised margin requirements forcing speculators to de-leverage positions.


• The Canadian dollar pared losses after a group of banks and pension funds agreed on steps to ease a credit crunch in the Canadian asset-backed commercial paper market.

Europe

• Inflation in the EMU moderated to 1.8% y/y in July from 1.9% y/y in June. The inflation fell 0.2% m/m in July, making it unlikely that the European Central Bank will hike interest rates before the credit-market problems subside.


• UK retail sales unexpectedly rose 0.7% m/m, the most in 5 months in July, after gaining an upwardly revised 0.4% m/m in June, the Office for National Statistics said.

Asia-Pacific

• Australia’s Rams Home Loans Group Ltd. failed to refinance A$6.17 billion ($5 billion) of short-term US loans, forcing lenders to seek emergency funding.

FX Strategy Update