Expert Analysis of Today's Market

• The greenback fell versus the yen but rose modestly against the euro and most other key currencies on Tuesday. The yen gained on continued carry-trade unwinding, particularly against sterling and the highyielding New Zealand and Australian dollars.


• The EUR/JPY continues its decline after last week’s gains. This week’s losses have been triggered by continued carry-trade unwinding as international equities are falling on credit-market concerns. The pair failed to break resistance at 158 yesterday. There is support in the 154-area, but a test of support in the 150-area is possible.

• The graph below illustrates a close relationship between the US stock market and the EUR/JPY. We are selling one unit of the EUR/USD and one unit of the USD/JPY.

Financial and Economic News and Comments

US & Canada

• The Conference Board’s consumer confidence index fell slightly less than expected to 105.0 in August. The confidence index is volatile, following July’s 7% increase, but does not show any dramatic decline yet, given the credit and housing fallout. The Conference Board’s present situation index fell to 130.3 in August from 138.3 in July. The expectations index dropped to 88.2 from 94.4.

• Prices in June in 20 US metropolitan areas declined 3.5% y/y after falling 2.9% y/y in May, the Case-Shiller report showed. As with the rest of the housing data, the downward trend continues without a sign of a nearterm recovery. However, there are local variations: Detroit prices fell 11% y/y while Seattle prices rose 8% y/y.


• Federal Reserve policy makers put aside concerns about the rising cost of credit at the August 7 meeting because they were not convinced a slowdown in inflation would last, according to the minutes of the session.


• This week’s most awaited event is a speech on “Housing and Monetary Policy” by Federal Reserve Chairman Ben S. Bernanke on Friday, which could offer hints on the future path of Fed policy and the dollar.


• The Bank of Canada needs to evaluate how recent developments may have made the Canadian economy more vulnerable to slowdowns in the US since a July economic forecast, BOC Deputy Governor Pierre Duguay said late yesterday.

Europe

• Ifo research institute said its German business confidence fell slightly less than expected to 105.8 in August from 106.4 in July. This is a 10-month low following the turmoil in the global credit market. Ifo’s gauge of executives’ expectations fell to 100.4 from 101.7. A measure of companies’ assessment of current conditions rose to 111.5, the first increase in 4 months, from 111.3.


• Money-supply growth in the euro-zone accelerated to the fastest pace in 28 years in July even before the European Central Bank flooded the market with liquidity. M3 money supply, which the ECB uses as a gauge of future inflation, rose 11.7% y/y.

Asia-Pacific

• The Bank of Japan will raise interest rates gradually based on developments in the Japanese economy and prices. “The bank would adjust the level of interest rates gradually in accordance with improvements in the economic and price situation,” the BOJ July 11-12 meeting minutes released today showed.


• Australia’s money market remains “under pressure” and the Reserve Bank of Australia will intervene if needed to stabilize the cost of credit, RBA Deputy Governor Ric Battellino said. The RBA has been unusually active during the recent international credit turmoil. “These operations have held the cash rate at the target and helped stabilize conditions more normally. Nonetheless some pressures remain,” Battellino said and promised: “If market developments warrant, the bank has the scope to further expand the provision of liquidity.”

FX Strategy Update