Expert Analysis of Today's Market

• The dollar fell versus most key currencies on Wednesday pressured by continued Fed policy-easing speculation and subprime-mortgage concerns. US Treasury Secretary Henry Paulson said the credit-market turmoil would last longer than the Asian economic crisis and the Russian default of the 1990s. According to Paulson, it would take longer because of the complexity of the mortgage products and that “we’re more globalized.” His comments increased rate-cut speculations. Short-term interest rate futures priced in about 75% chance that the Fed will cut the Fed funds target rate by 50 basis points at the FOMC Sept. 18 meeting. The US dollar index traded in the low 79s, a fresh 15-year low and well below the vital support at 80. The drop below this support indicates further dollar declines.


• After breaking the 1.3850-area resistance, the EUR/USD rose for the sixth day trading over 1.39 for the first time. This is an important breakout and 1.40 is expected. The pair is overbought and we may see a pullback and buying opportunity after the likely announcement of the Fed rate cut.

Financial and Economic News and Comments

US & Canada

• Like US Treasury Secretary Henry Paulson, Bank of Canada Governor David Dodge also agreed that the current turmoil in credit markets may take longer to resolve than previous periods because of ‘complexity.’ Securities that “packaged and repackaged” assets helped distribute risk through markets although failing to clarify to investors where the payouts came from, Dodge said. “The re-pricing of credit risk is an ongoing process….Unfortunately, it may take somewhat longer than in previous periods, because of the opacity and legal complexity of so many of these structured products,” Dodge said in a speech in London.

Europe

• Eurozone industrial output rose a stronger-than-expected 0.6% m/m.


• UK claims for unemployment benefits fell 4,200 in August, the lowest in over 2 years, the Office for National Statistics said. The jobless rate declined to a 2-year low of 2.6%.


• Bank of England Governor Mervyn King said the BOE will not amend its system for financing commercial banks by changing its collateral rules or making longer-dated loans because that would encourage risky behavior in future. “The provision of such liquidity support undermines the efficient pricing of risk by providing ex-post insurance for risky behavior,” according to King’s written testimony to the UK Parliament’s Treasury Committee. “That encourages excessive risk- taking, and sows the seeds of a future financial crisis.”

Asia-Pacific

• Japanese Prime Minister Shinzo Abe resigned after failing to regain public support following his party’s defeat in Upper House elections in July. The yen was little changed versus the dollar but mostly lower in the cross trades.


• China’s retail sales rose 17.1 % y/y in August to 711.7 billion yuan ($95 billion), the fastest pace in more than 3 years, after gaining 16.4% y/y in July, the Statistics Bureau said.

FX Strategy Update