Expert Analysis of Today's Market

• The greenback, trading mostly higher versus key currencies on Tuesday, rose against the European and dollar-block currencies. Today’s FX main trading feature was unwinding of carry trades and the yen rallied against all currencies. The dollar benefited in the cross trades from safe haven flows. The Canadian dollar fell modestly as the Bank of Canada left its key interest rate unchanged at 4.5%. The USD/CAD yesterday broke its short-term bear-trend and we are buying one unit of the pair with a stop at 0.9670.


• The GBP/USD fell on lower-than-expected UK inflation. The tame inflation is increasing speculation the Bank of England will lower interest rates. Sterling, having been trading in a narrow range between resistance at 2.05 and support at 2.03, is testing support at the 2.03 handle. If this support is broken, the pair will fall to 2.00.

Financial and Economic News and Comments

US & Canada

• The NAHB housing market index fell to 18 in October, the National Association of Home Builders/Wells Fargo reported; a decline to 19 was expected. Bigger discounts and sweetened incentives have yet to revive demand as buyers await even bigger bargains, builders said. The report indicates the housing slump will continue into 2008. A reading below 50 indicates negative conditions.

• US industrial production rose as expected 0.1% m/m and 1.9% y/y in September and capacity utilization was unchanged from a downwardly revised 82.1%, the Federal Reserve said. Excluding motor vehicles, total industrial production rose 0.3% m/m and 4.3% y/y in September. The drop in motor vehicle output in September was partly due to temporary labor unrest at General Motors.


• The Treasury Department’s Treasury International Capital System (TIC) report showed that international investors sold a record amount of US financial assets in August as tightening access to credit threatened economic growth and spurred an exodus from US equities. Total holdings of equities, notes and bonds fell a net $69.3 billion after a $19.2 billion increase in July.


• The Bank of Canada left its policy interest rate unchanged at 4.5% as expected. The BOC said there are significant risks to the Canadian economic outlook. “The Bank judges that the risks to its inflation projection are roughly balanced, with perhaps a slight tilt to the downside.” The BOC cut its 2008 economic growth forecast, citing the drag on exports from a US housing slowdown and a higher Canadian dollar.

Europe

• UK consumer price inflation unexpectedly held steady at 1.8% y/y in September, below the Bank of England’s 2% target for a third month, the Office for National Statistics said.


• The ZEW economic research group reported its index of German investor and analyst expectations unexpectedly held steady at -18.1 in October and the ZEW’s readings for expectations in the eurozone fell to - 19.

Asia-Pacific

• Japan’s Finance Minister Fukushiro Nukaga said G-7 officials will discuss currencies and financial markets.

FX Strategy Update