Expert Analysis of Today's Market

• The dollar was higher against sterling and the Canadian and Australian dollars on Tuesday but slightly lower versus the yen, Swiss franc and euro.


• The EUR/USD traded little changed despite the weaker-than-expected ZEW confidence index. The pair, tentatively breaking its bullish trend-line, is currently oversold. Investors seem to expect a rally as the Federal Reserve is likely to cut interest rates more than other central banks. However, we think there is a good chance of a test of support at the 1.33-area. If this is broken, the pair will drop.

Financial and Economic News and Comments

US & Canada

• Canadian retail sales unexpectedly fell 0.9% m/m to C$34.6 billion ($32.7 billion) in June, following May’s 2.6% m/m rise, as consumers bought fewer cars and spent less on gasoline, Statistics Canada reported.


• Canadian consumer prices rose 0.1% m/m and 2.2% y/y in July, above the Bank of Canada’s target for a fifth straight month, Statistics Canada said. Core inflation rose 0.1% m/m and 2.3% y/y. All numbers were in line with forecasts. Mortgage costs rose 0.8% m/m in July, the biggest increase since August 1994.


• Federal Reserve Bank of Richmond President Jeffrey Lacker spoke at an annual luncheon of the Risk Management Association of Charlotte: “financial market volatility, in and of itself, does not require a change in the target federal funds rate.” Stocks pared gains after his comment.


• Senate Banking Committee Chairman Christopher Dodd said Fed Chairman Ben S. Bernanke agreed to use “all of the tools at his disposal” to restore stability in financial markets roiled by the subprime mortgage crisis.

Europe

• The Bank of England said it loaned £314 million ($628 million) from its standing facility at its penalty interest rate of 6.75% yesterday. The first time the BOE used its standing facility since July 17. There were rumors of an insurance company in trouble.


• The ZEW index of investor and analyst expectations for Germany dropped more than forecast to -6.9 in August, the lowest since December, from 10.4 in July, the ZEW Center for European Economic Research reported. The ZEW index for the EMU region fell more than expected to -6.1 in August from 7.2 in July.


• German unemployment fell more than forecast in July, pushing the unemployment rate to a 14-year low of 9.0%.


• The EMU’s exports rose 9.0% and imports increased 5.0% in the first half, according to the European Union’s statistics office. This left the 13-nation euro area with a trade surplus of €11.5 billion ($15.5 billion), compared with a deficit of €18.3 billion a year earlier.

Asia-Pacific

• The People’s Bank of China raised its interest rates for the fourth time since March as inflation has surged to a 10-year high. The benchmark one-year lending rate will increase 0.18% point to 7.02% tomorrow, the PBC said. The one-year deposit rate will rise 0.27% point to 3.6%. The Chinese economy grew at the fastest pace in more than 12 years in Q2 on strong investment and exports. Consumer prices rose 5.6% y/y in July as the cost of food soared.


• Japanese Finance Minister Koji Omi said financial markets have calmed down since the US subprime mortgage problem caused stocks to plummet and the yen to strengthen. Omi said he expects the Bank of Japan to consider the recent developments in markets during the BOJ August 22-23 meeting. The BOJ is expected to keep its benchmark interest rate at 0.5% at the meeting.

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