Expert Analysis of Today's Market

• The dollar was little changed versus other key currencies on Thursday, awaiting Federal Reserve Chairman Ben S. Bernanke’s important speech tomorrow. There were more indications of continued fallout from the US subprime trouble. The Bank of England lent at its penalty rate to unnamed banks and an Australian hedge fund filed for bankruptcy protection. Carry trades continue to dominate the FX market. As US stocks stabilized with just minor losses in the afternoon trading, major currencies moved back to unchanged position.


• After falling to the lowest level since June 2006 on massive unwinding of yen carry trades sparked by the US subprime debacle, the USD/JPY has recovered somewhat in a volatile fashion on jittery equity markets. The pair has been in a downtrend since the beginning of July. If this resistance is broken, the pair will rally. The USD/JPY, currently testing support at 115.50, may fall further as more fallouts from the subprime losses are likely to occur.

Financial and Economic News and Comments

US & Canada

• The US Q2 GDP rose at a slightly less-than-expected seasonally adjusted 4.0% q/q annual rate, revised data from the Commerce Department showed. Stronger business spending and exports led to the upward GDP revision. Consumer spending increased 1.4% q/q up from the previously reported 1.3% rise.

• Corporate profits after taxes grew 5.4% q/q and 3.5% y/y to $1.154 trillion. Price inflation gauges were revised lower. The PCE price deflator excluding food and energy rose 1.3%, below the previously estimated 1.4% advance and lower than the Q1’s 2.4% increase.


• Jobless claims rose 9K to 334K in the week ended August 25, the Labor Department said. The 4-week average rose 6,250 last week to 324,500, the fifth straight rise.


• Fed Watcher Greg Ip wrote in a Wall Street Journal article on Thursday that the Federal Reserve is not rushing to cut benchmark interest rates because it wants to break investors’ view that the Fed was there to bail them out. Fed Chairman Ben S. Bernanke’s speech tomorrow is likely to give more clues about the Fed’s policy stance.

Europe

• The Bank of England loaned £1.6 billion ($3.2 billion) at its penalty rate of 6.75%, suggesting commercial banks are still reluctant to lend to each other after the US subprime-mortgage collapse.


• UK house price inflation eased to 9.6% y/y in August from 9.9% y/y in July, Nationwide Building Society said. Lenders approved 115,000 loans for house purchases last month, the same as in June, the Bank of England said.


• Bloomberg’s gauge for European retail sales rose for the first time in 4 months to 51 in August from 46.2 in July, indicating expanding retail sales growth. Rising prices and increased competition squeezed retailers. Profit margins contracted by the most in 19 months, with the index falling to 42.6 in August from 43.6 in July, the report showed. Prices paid to suppliers rose to 61.6 in August from 57.7 in July.

Asia-Pacific

• Japan’s retail sales fell a more-than-expected 2.2% y/y in July, the Trade Ministry said, the biggest decline since June 2005. Higher taxes, slow wage growth and bad weather reduced retail sales.


• Basis Yield Alpha Fund, an Australian hedge fund, filed for bankruptcy protection renewing concerns the US subprime trouble is not over yet.


• Australian capital spending on equipment, buildings and plants rose a stronger-than-expected 6.3% q/q in Q2 on a booming mining sector, the Bureau of Statistics said.

FX Strategy Update