Expert Analysis of Today's Market

• The dollar was mixed on Thursday, near record lows against the euro but higher against the yen. Carry-trades resumed on encouraging news that the commercial paper market may be stabilizing and rising equity prices. The driver for the dollar is the weakening US economic outlook and the expected Fed interest-rate cut. Will today’s improvement in the credit market encourage the Fed to make less aggressive rate cut next week? How will the market react? There could be a buy-the-rumor-sell-the-fact trade. The market is pricing in a 50 basispoint cut. We do not see more than a 25 basis-point Fed funds rate cut which may be in addition to another 50 basis-point cut in the discount rate.


• The yen traded broadly lower versus the dollar and in cross trades pressured by increased risk appetite, the political uncertainty following Prime Minister Shinzo Abe’s resignation announcement on Wednesday and possible downgrade of the Japanese economic outlook. The USD/JPY rallied on Thursday testing important resistance in the 115.50 area. If this is broken, the pair will gain more. In the cross trades, both the EUR/JPY and GBP/JPY broke the last two-month bear-trends today.

Financial and Economic News and Comments

US & Canada

• US initial jobless claims rose 4K to 319K in the week ended Sept. 8, the Labor Department said. Claims for the Sept. 1 week were revised to 315K from 318K. Last week’s survey period included the Labor Day holiday. The 4-week average fell by 1K last week to 324K, the second-straight decline. The Federal Reserve has indicated it has been following this series in the light of the credit-market turmoil. The numbers did not show the dramatic deterioration seen in the non-farm payroll report.


• The US budget deficit widened more than forecast in August to $117 billion, compared with a $64.7 billion deficit for August 2006, the Treasury said.


• The Fed’s commercial paper data showed an 8.9 billion drop, the smallest decline in 5 weeks. The drop suggests the credit market is starting to unwind and credit contagion may be easing.


• Canadian capacity utilization rose in line with expectation to 83% in Q2 from a revised 82.8% in Q1, Statistics Canada said.

Europe

• The ECB bulletin noted that policymakers will pay “great attention” to financial-market developments. While it said the economic outlook remains favorable, market turbulence has increased uncertainty on this view. The ECB said it will act in a “firm and timely” manner to ensure risks do not materialize and to firmly anchor inflation expectations. “This is all the more important at times of financial market volatility,” it said, reiterating that monetary policy is “still on the accommodative side.”


• ECB council member and Bank of Finland governor Erkki Liikanen hinted that an ECB rate increase is not imminent, as market turbulence may be prolonged. “The faster transparency increases on the market, the faster markets will normalize...it's not a question of weeks, more a question of months,” Liikanen said.


• The Kiel Institute cut German 2008 growth forecast to 2.4% from 2.7%. Despite the Kiel growth cut, the Institute expects the ECB to hike rates one more time to 4.25% in December.


• The Bank of England relaxed restrictions on the amount of money financial institutions need to hold with the BOE, encouraging them to lend more to each other as it tries to reduce overnight borrowing costs.


• The Swiss National Bank raised the 3-month Libor target rate by a quarter-point today to 2.75%, the highest since September 2001.

Asia-Pacific

• China’s industrial production rose 17.5% y/y in August, slowing for a second month after the Chinese government increased taxes on exports.


• The Bank for International Settlements reported that Japanese investors are increasing holdings of foreign assets due to low Japanese yields and deteriorating Japanese economic fundamentals.

FX Strategy Update