Expert Analysis of Today's Market

• The yen pared overnight gains after the Federal Reserve on Friday cut the discount rate on loans to banks by 0.5 percentage point, to 5.75% and acknowledged downside risk to the US economy from the global credit crunch. Meanwhile, the dollar fell against the euro, sterling and dollar block currencies on the partial easing move from the Fed.


• The EUR/JPY fell to the lowest level since October on massive unwinding of yen carry trades sparked by the global credit crunch. The chart below shows the pair has been unwound in a very short period. There is support at 150 and resistance at 156, but the market is volatile so the pair can move dramatically again.

• The dollar index unsuccessfully tested the resistance from the bear-trend. Today’s Fed move “to promote the restoration of orderly conditions in financial markets” eased safe-haven flows into the dollar. However, the credit crunch is not over yet. A break of the resistance will have a positive effect on the dollar.

Financial and Economic News and Comments

US & Canada

• The Federal Reserve cut the discount rate, the interest rate the Fed charges to banks, by 0.5 percentage point, to 5.75%, acknowledging a policy shift is required to contain the subprime-mortgage trouble. The Fed did not change its target for the federal funds rate, still at 5.25% for more than a year. However, the Fed is likely to cut the fed funds rate at its next meeting in September. The discount-rate cut will assist in lending to institutions in need of financing as the Fed will accept a broad range of collateral including home mortgages. Today’s Fed action also includes an extension in the discount window borrowing, allowing 30-day financing that is renewable, instead of a standard overnight loan.


• US consumer confidence fell more than expected to 83.3 in August, the lowest reading since August 2006, from 90.4 in July, as falling stocks and widening credit crunch added to worries about weakness in the US housing market, the Reuters/University of Michigan preliminary sentiment index showed.

Europe

• German producer prices unexpectedly fell 0.1% m/m and slowed to a 1.1% y/y rate in July, the lowest reading since April 2004, the Federal Statistics Office said. Inflation in the EMU appears benign and the ECB is unlikely to raise interest rates as long as the present credit problems persist.

Asia-Pacific

• The Reserve Bank of Australia intervened in the FX market for the first time in 6 years, since the Australian’s dollar was allowed to trade freely in 1983, to stem the Aussie’s steepest decline. The global credit crunch has made financial markets “extremely skittish,” RBA Governor Glenn Stevens said. “Where market conditions are disorderly, we are prepared to intervene from time to time,” he said.


• Japan’s top financial diplomat, Naoyuki Shinohara, reiterated the Ministry of Finance’s standard line on currencies, saying he was watching the market carefully but would not comment on specific levels. It is unlikely the Bank of Japan will raise interest rates at its meeting next week.


• Japan’s leading economic indicators index fell more than expected in July to 72.7.

FX Strategy Update