Expert Analysis of Today's Market

• Trading mixed on Friday, the dollar was little changed against the euro, lower versus the pound and higher against the yen. The yen fell against major currencies as equity prices rose inducing investors to resume carry-trades. After breaking parity yesterday, the Canadian dollar traded at its weakest level in 31 years. The Australian dollar also rose.


• The EUR/USD pared gains after weaker-than-expected eurozone data for September dragged the pair from a fresh record high. The pair is likely to test the 1.42 resistance. The dollar outlook remains negative based on the Fed easing policy and uncertain US economic outlook. However, the market is re-estimating the chances of aggressive ECB interest-rate hikes. The market is now pricing in a 25 basis-point increase by the ECB, while the Fed is expected to continue lowering rates. The risk to this outlook is that the US economy, particularly the labor market, will prove to be stronger than expected and this would pressure the EUR/USD. There is support in the 1.40 area.

• The dollar index fell to a fresh 15-year low at 78.40 before recovering slightly. The index is testing crucial support at this level. If this support holds, the index will recover and may even test the bear-trend. A break of this support may lead to a dollar freefall.

Financial and Economic News and Comments

US & Canada

• No major US economic releases.


• Canada’s retail sales unexpectedly declined 0.8% m/m in July after falling 1.1% m/m in June, Statistics Canada reported.

Europe

• Europe’s manufacturing and service industries grew at the slowest pace in 2 years in September, reducing the chances of ECB interest-rate hikes. Royal Bank of Scotland Group Plc said the preliminary estimate of its composite index fell to 54.5 in September from 57.4 in August. The number, indicating an expanding economy, however, is the lowest level since September 2005 and below the consensus estimate of 56.9. The manufacturing index declined to 53.2 from 54.3, while a gauge of services dropped to 54.0 from 58.0.


• ECB executive board member Lorenzo Bini Smaghi said constant commentary on exchange rates from European politicians undermines the credibility of the ECB. German Chancellor Angela Merkel said Germany would resist any attempts to influence the ECB, countering French President Nicolas Sarkozy’s campaign for lower interest rates.

Asia-Pacific

• China’s inflation rate will probably remain contained, central bank Governor Zhou Xiaochuan said after a report this week showed a record number of households expect price increases to accelerate. “Inflation is unlikely to get out of control,” Zhou said.

FX Strategy Update