Expert Analysis of Today's Market

• The dollar was lower against the euro and yen on Monday but reversed overnight losses versus the dollarblock currencies as US stocks fell. The yen was initially lower as the news that the US government would work with big banks to help clean up credit-market problems increased risk appetite. However, falling stocks in the US increased risk aversion and the high yielding currencies reversed earlier gains against the yen. Sterling rose on a stronger-than-expected UK house price gain.


• The EUR/USD rose ahead of tomorrow’s European inflation reports on speculation quickening inflation will prompt the European Central Bank to keep raising interest rates. The pair’s short-term and long-term trends are still up. There is resistance at the 1.43-handle. If this is broken, the pair will possibly test the 1.4570 area, which would be the pre-euro highs for the German mark. We expect volatility in the pair this week as the FX market awaits the October 19 G-7 meeting. There are supports in the 1.40 and 1.38 areas.

Financial and Economic News and Comments

US & Canada

• Federal Reserve Chairman Ben S. Bernanke is likely to say the US economy is strong enough to weather the housing slowdown when he addresses the Economic Club of New York tonight.


• Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. agreed to start a fund of as much as $80 billion to buy assets from structured investment vehicles (SIVs). Treasury Secretary Henry Paulson brokered talks in Washington with the US largest banks after a shutdown of the commercial paper market left SIVs and other sellers unable to borrow.


• International Monetary Fund Managing Director Rodrigo de Rato said the dollar has more room to fall over the next several years. Over the medium term “we still see room for further depreciation,” Mr. de Rato said. As for the euro, he said, it is “very near” its equilibrium value. His comments seem to imply the Asian currencies may appreciate.


• The New York Fed’s manufacturing index rose to a stronger-than-expected 28.8 in October, the highest since July 2004, from 14.7 in September. The number indicates a continued expansion in the New York manufacturing sector.

• Canada’s leading economic index increased a stronger-than-expected 0.4% m/m in September.

Europe

• UK home prices rose a stronger-than-expected 2.7% in October driven by a surge of higher value properties ahead of new regulations. Average asking prices in London increased a record 5.0% m/m in October after falling 2.5% m/m in September, according to Rightmove’s monthly survey. The surge in London price helped push the countrywide increase to 2.7% m/m, reversing September’s 2.6% m/m decline.


• European Central Bank President Jean-Claude Trichet said the ECB has not changed its economic growth forecasts.

Asia-Pacific

• The People’s Bank of China announced today that it has decided to raise the RMB reserve requirement ratio for depository financial institutions by 0.5 percentage points as of October 25, 2007, to strengthen liquidity management in the banking system and curb the excessive growth of money and credit.

FX Strategy Update