Expert Analysis of Today's Market

• In a narrow trading range against major currencies on Monday, the dollar fell against sterling and the Australian dollar but rose against the euro. The yen gained modestly versus most key currencies overnight after the news that the newly appointed Chief Cabinet Secretary and government spokesman may be more open to the idea of a more independent BOJ. However, the yen pared gains in midday trading in New York.


• The EUR/USD fell slightly after ECB President Jean-Claude Trichet did not want to promise an interest-rate increase at the next ECB policy meeting. European banks continue to be affected by the US subprime mortgage debacle. A German bank had to be bailed out today and the ECB continues to add large amounts of liquidity to the banking system. The EUR/USD found support from the bullish trend-line in the 1.34 area last week. There is resistance in the 1.37 area. If this resistance is broken, the pair will likely test the high at 1.3850. If not, a head-and-shoulder top may develop.

Financial and Economic News and Comments

US & Canada

• US existing-home sales fell slightly in July for a fifth consecutive month and inventory of unsold properties rose indicating the housing slump will continue. July’s existing-home sales declined 0.2% m/m and 9.0% y/y, to an annual rate of 5.75 million, from 5.76 million in June, the National Association of Realtors said. The median price of an existing home fell 0.6% in July from a year ago to $228,900. The inventory of homes for sale at the end of the month rose 5.1% to 4.59 million. At the current sales pace, that represented 9.6 months’ worth of supply, up from 9.1 months’ worth at the end of the prior month. The inventory of single-family homes represented a 9.2 months’ supply, the most since October 1991.

• The combined risk of mortgage defaults and heavy debt loads has overtaken terrorism as the biggest shortterm threat to the US economy. The National Association for Business Economics said almost a third of its surveyed economists listed debt-related problems as their top worry: about 18% cited the effects of subprimeloan defaults and 14% listed excessive household or corporate debt.

Europe

• European Central Bank President Jean-Claude Trichet said he was never pre-committed to interest-rate increases. In his first public comments since the credit crunch began, Trichet said the ECB’s governing council will wait until it meets September 6 before deciding whether to carry out its plan to raise borrowing costs from 4.0%.


• German state-backed bank Landesbank Baden-Wuerttemberg agreed to buy Landesbank Sachsen Girozentrale following a €17.3 billion ($23.7 billion) credit bailout because of investments in US subprime debt.

Asia-Pacific

• Japanese Prime Minister Shinzo Abe appointed Fukushiro Nukaga as finance minister to replace Koji Omi and Chief Cabinet Secretary and government spokesman Yasuhisa Shiozaki was replaced by Kaoru Yosano. Yosano, having served as education minister, trade minister and minister for economic and fiscal policy, is seen as favoring a more independent central bank. He could make it easier for the Bank of Japan to normalize interest rates.

FX Strategy Update