Expert Analysis of Today's Market

• The dollar traded lower on Wednesday pressured by increased recession risk as ADP forecast slower US employment growth and US pending home sales were weaker than expected. The yen rose on increased risk aversion as global stock markets fell. The strain in the interbank borrowing market continues as banks are hesitant to lend to each other. London interbank borrowing cost rose to a 9-year high yesterday. The European Central Bank said it is monitoring the volatility in the European money markets and may act tomorrow to help restore “orderly conditions.” This should rule out any interest-rate hike at tomorrow’s ECB meeting and some easing on the European money market rates may be possible.


• The USD/JPY is testing support at the 115 handle. If this support is broken, the pair will likely fall to the next important support in the 113-area.

Financial and Economic News and Comments

US & Canada

• The National Association of Realtors’ index for pending sales of existing homes decreased at a seasonally adjusted annual rate of 12.2% to 89.9 in July from June’s 102.4, and fell 16.1% y/y, the NAR said. The fall in pending home sales indicates there is no end to the US housing slump.


• US private-sector employment grew by 38K in August, the lowest monthly growth in 4 years, according to the ADP employment report. The ADP report suggests the Labor Department’s count of non-farm payrolls, due on Friday, may have grown more slowly in August than the forecast. The consensus view is the government’s non-farm payroll number grew by 123K jobs. The ADP report suggests total non-farm payrolls grew by about 65K, including 27K estimated government jobs, which are not included in the ADP report. This would make a dramatic easing by the Federal Reserve more likely. The unemployment rate is significant as it is a leading indicator of recession, while job growth is at best a coincident indicator.


• Richmond Fed President Jeffrey Lacker (one of the most hawkish Fed presidents) told Reuters late Tuesday he would back an interest-rate cut if the evidence pointed to slowing economic growth and diminished inflation, but said it was too early to be sure such a move was warranted.


• The Bank of Canada held its key interest rate steady at 4.50%, as expected, and omitted a reference to the need for a “modest further increase” in rates -- a comment the BOC made when it raised rates in July. Instead, it said the current level of its overnight target was “appropriate.”

Europe

• The PMI for the European service industries declined to 58.0 in August from 58.3 in July.


• The Bank of England offered to provide additional cash to reduce “unusually high” overnight interest rates. The BOE said it increased by 6% the level of reserves each bank can hold with the central bank, in a major move to cushion the credit-market turmoil.


• Eurozone retail sales rose 0.1% m/m and 0.5% y/y in July after rising 0.6% m/m in June, Eurostat said.


• The PMI for the UK service industry unexpectedly rose to 57.6 in August from 57 in July, the Chartered Institute of Purchasing and Supply and Royal Bank of Scotland Group Plc said.


• The OECD lowered its 2007 forecasts for the US to 1.9% from a May number of 2.1% and for the euro region to 2.6% from 2.7%. The OECD said the forecasts may be reduced further as borrowing costs rise following the US subprime-mortgage turmoil. “Downside risks have become more ominous,” Jean-Philippe Cotis, the OECD's chief economist, said.

Asia-Pacific

• Yoshimi Watanabe, Minister of State for Regulatory Reform, Administrative Reform, Regional Revitalization and Regional Government, said he will watch banks half-year earnings results for any losses related to US subprime mortgage defaults, prompting investors to dump stocks.


• The Reserve Bank of Australia left its key interest rate unchanged at 6.50%, as expected.

FX Strategy Update