Expert Analysis of Today's Market

• The dollar fell against major currencies on Thursday despite relatively sound US economic data and fairly cautious ECB and BOE statements. The yen was also weak on modest rebuild of carry trades as international stock markets stabilized. Overall, today’s ISM service report was better than expected, but the employment component was weak and may be a harbinger of a weak US employment report.


• The EUR/USD rose ahead of tomorrow’s important US job report. The pair is testing the resistance in the 1.37- area. If this is broken, the pair may move to the highs set earlier this summer.

Financial and Economic News and Comments

US & Canada

• US service industries expanded faster than forecast in August. The ISM index of non-manufacturing businesses held at 55.8 for a second month, still indicating an expanding service sector, the Institute for Supply Management said. New orders jumped to 57.0 while employment dropped into contractionary territory at 47.9, its lowest level since December 2002.

• US initial jobless claims fell 19K to 318K in the week ended September 1, easing the concerns of rising unemployment after gains over the prior 5 weeks. The 4-week average rose to 326K. Continued claims rose 25K as the 4-week average reached a 20-month high, the Labor Department reported. Tomorrow’s employment report will be closely watched and will give us more clues to the outlook of the US economy and Fed policy.


• US productivity advanced at a more rapid pace last quarter than earlier estimated as economic growth accelerated, while labor cost growth slowed, according to revised data released by the Labor Department. Non-farm business productivity rose at a seasonally adjusted annualized rate of 2.6% q/q in Q2. Unit labor costs rose 1.4% q/q and 4.9% y/y, the fastest rise since 2000.


• The share of all US mortgages entering foreclosure rose to 0.65% in Q2, an all-time high, from 0.58% in Q1, the Mortgage Bankers Association reported. The percentage of subprime borrowers making late payments increased to 14.82% from 13.77%.

Europe

• The European Central Bank left its key interest rate unchanged at 4.0% after earlier today adding €42.25 billion ($57.7 billion) in emergency cash to ease the credit crunch that had pushed overnight deposit rates to a 6-year high.


• “Financial market volatility and reappraisal of risks over recent weeks have led to an increase in uncertainty,” ECB President Jean-Claude Trichet said at a press conference after the rate decision. “Given this high level of uncertainty it’s appropriate to gather additional information before drawing conclusions” on monetary policy.


• The Bank of England held its key interest rate steady at 5.75%, as expected. The BOE did not usually issue a statement when rates were unchanged, but did today. “There are tentative signs of a slowing in consumer spending,” the BOE said in an accompanied statement. “But the recent solid pace of output growth has been sustained and the margin of spare capacity appears limited. Indicators of pricing pressure remain somewhat elevated. It is too soon to tell how far the disruption in financial markets will impair the availability of credit to companies and households.”


• German real manufacturing orders fell a larger-than-expected 7.1% m/m in July, the biggest monthly drop since September 1991. From a year earlier, orders gained 9.8%, the Economy and Technology Ministry said.


• UK industrial production unexpectedly fell 0.1% m/m and rose a smaller-than-expected 0.9% y/y in July. Manufacturing output decreased 0.3% m/m and rose 0.8% y/y in July, the National Statistics said.

Asia-Pacific

• China increased reserve requirements for banks to 12.5% of deposits, starting September 25, up from 12%, the People’s Bank of China said.


• The Reserve Bank of Australia said it will buy debt backed by home loans to add cash to the financial system, after the subprime credit rout eroded demand for asset-backed securities and drove up interest rates. Australian banks moved funding for loans onto their balance sheets after problem refinancing in the short-term debt markets.


• Australian employment rose a more-than-expected 31,900 in August after gaining a revised 19,000 in July, the Bureau of Statistics said. The jobless rate was unchanged at a 33-year low of 4.3%.

FX Strategy Update