Expert Analysis of Today's Market

• The greenback declined against key currencies on Friday falling to a record low against the euro for a seventh straight day on speculation the Federal Reserve will cut interest rates for a second time this year. The Canadian dollar rose to a 31-year high after prices of the Canadian commodity exports surged. Sterling traded near the lowest in more than 2 1/2-years versus the euro after the Financial Times reported that Northern Rock Plc had been forced to borrow a further £5 billion ($10 billion) to stay in business. The aussie headed for the biggest monthly gain in more than 20 years as overseas funds sought the higher yields of the Australian bonds.


• The EUR/USD is ending the quarter at an all-time high. The 1.42 resistance was penetrated today, indicating higher prices. This may lead to further selling of the greenback, possibly a test of the synthetic euro’s high.

Financial and Economic News and Comments

US & Canada

• US personal income increased less than expected at a seasonally adjusted rate of 0.3% m/m in August following July’s 0.5% m/m rise, the Commerce Department said.


• US personal spending rose a more-than-expected 0.6% m/m in August after rising 0.4% m/m in July, the Commerce Department said.


• A price index for personal consumption expenditures fell 0.1% m/m in August after rising 0.1% m/m in July. The PCE price index excluding food and energy, or core PCE, increased 0.1% m/m a sixth straight month. The PCE price index climbed 1.8% y/y in August after rising 2.1% y/y in July. The core PCE price index receded to 1.8% y/y in August, the lowest rate since 1.8% in February 2004, after rising 1.9% y/y in July. The Federal Reserve has been watching this year-over-year core PCE very closely for signs of serious inflation. The Fed’s preferred range is considered to be 1.0-2.0%.


• US construction spending unexpectedly rose in August, led higher by solid nonresidential outlays that helped the industry overcome the heavy drag of housing. August construction spending increased 0.2% at a seasonally adjusted annual rate of $1.167 trillion after falling a revised 0.5% in July, the Commerce Department said.


• The National Association of Purchasing Management-Chicago’s index of business activity rose to 54.2 in September from 53.8 in August.


• The Reuters/University of Michigan index of consumer sentiment was 83.4 in September, identical to the August level and just below September 2006’s 85.4. The consumer expectations index was 74.1 in September, just above August’s 73.7 and below September 2006’s 78.2. The current economic conditions index was 97.9 in September, between August’s 98.4 and September 2006’s 96.6.


• Federal Reserve Bank of St. Louis President William Poole said in a speech in New York today that he sees initial signs that the credit-market turmoil is easing and the US economy is likely to grow at a moderate pace in the next few years. “My best guess is that the inherent resilience of the U.S. economy along with future policy actions, should they be desirable, will keep the economy on a track of moderate average growth and gradually declining inflation over the next few years,” Poole said.


• The Canadian economy grew a less-than-expected 0.2% m/m in July, the same as June, Statistics Canada reported.


• Canadian banks have not been able to roll over all of their asset-backed commercial paper amid the global credit crunch, Bank of Montreal chief financial officer Karen Maidment said.

Europe

• EMU consumer prices inflation rose 2.1% y/y in September above the European Central Bank’s upper ceiling of its inflation target of 2.0%, from 1.7% y/y in August, according to Eurostat.


• European confidence in the economic outlook dropped more than expected to a 16-month low in September. An index of sentiment among executives and consumers in the eurozone fell to 107.1 in September from a revised 109.9 in August, the European Commission said.


• German retail sales unexpectedly fell 1.4% m/m in August after rising 0.6% m/m in July, the Federal Statistics Office said. Sales fell 2.2% y/y.

Asia-Pacific

• Japan’s industrial production rose 3.4% m/m in August to a record, the Ministry of Economy, Trade and Industry said. Spending by households climbed a faster-than-expected 1.6% y/y in August, beating forecasts for a 1.2% gain. Spending by households rose even as the unemployment rate increased to 3.8% in August from a 9-year low of 3.6% in July, according to separate data released today. Finance Minister Fukushiro Nukaga said the employment situation is improving and the jobless rate probably only worsened because more female workers entered the labor market.


• The People’s Bank of China said it will maintain a “moderately tight” monetary policy in the last quarter of 2007 to curb inflation, limit asset prices and prevent the economy from overheating.

FX Strategy Update