Expert Analysis of Today's Market

• The greenback fell against major currencies on Friday despite better-than-expected US economic data. The dollar was pressured by continued speculation the Federal Reserve will lower interest rates while other major central banks will increase rates. Interest rate futures show traders see about 60% chance the Fed will lower its benchmark rate to 5.0% from 5.25% by next month, compared with a 40% chance a week ago. Moreover, interest rate futures indicate about a 90% chance the European Central Bank will raise rates in September. The yen gained against the dollar but was mostly weaker in cross-trades as risk aversion subsided.


• The EUR/USD rose for a third day pressured by safe haven flows into US treasuries during the height of the credit crunch, but the pair is now trading higher on expected improving European yield and growth differentials. The pair found support from the bullish-trend lined in the 1.34 area. There is resistance in the 1.37 area. If this resistance is broken, the pair will likely test the highs of late July/early August.

Financial and Economic News and Comments

US & Canada

• US durable-goods orders surged a stronger-than-expected 5.9%m/m and 9.1% y/yin July to $230.7 billion, from an upwardly revised 1.9% m/m gain in June, the Commerce Department announced. The rise indicates that orders were picking up before this month’s credit trouble, led by gains in manufacturing, spurred by dwindling inventories and increased exports. Excluding transportation, durable-goods orders rose 3.7% in July, the most in almost two years.

• US new-home sales unexpectedly rose 2.8% m/m to an annual pace of 870K in July from an upwardly revised 846K rate in June, the Commerce Department said. Home prices rose 3.9% m/m and 0.6% y/y. The inventory of homes sold fell to 533K from 538K. Note that sales cancellations are not included in the sales number and they may be higher than usual.

Europe

• Growth in Europe’s manufacturing and service industries slowed slightly more than expected in August as the pace of orders cooled, indicating turmoil in global credit markets may be starting to weigh on the economy. The preliminary estimate of the overall PMI for the eurozone fell to 57.2 in August from 57.5 in July. PMI services flash was 57.9 in August versus 58.3 in July; 58.0 was expected. PMI manufacturing was 54.3 in August down from 54.9 in July; 54.5 was expected.


• German important prices increased a less-than-expected 0.3% m/m in July.

Asia-Pacific

• Japan’s top financial diplomat Naoyuki Shinohara said on Friday the worst was over in the overall adjustment in financial markets but that market adjustment would continue.


• Chinese assistant central bank governor Yi Gang said China needs positive real deposit rates, in a sign that the monetary authority still plans to raise interest rates this year to keep pace with inflation.

FX Strategy Update