Expert Analysis of Today's Market

• Pressured by weak US confidence and falling home prices, the dollar traded near recent lows versus key currencies on Tuesday ahead of the Federal Open Market Committee’s interest-rate decision tomorrow. The Canadian and Australian dollars saw some profit-taking as commodity prices eased. The yen weakened modestly as rising Japanese unemployment dimmed hopes for an early Bank of Japan rate increase. Sterling, today’s biggest mover, rose to a 26-year high after Bank of England Monetary Policy Committee member Kate Barker suggested the BOE may not cut interest rates.


• The EUR/USD was initially pressured by a Wall Street Journal report that a Fed rate cut tomorrow is no sure bet and Fed officials are not seriously considering a half-point cut. In the article, Greg Ip argued the FOMC choice is between a 25 basis-point cut and an unchanged Fed funds rate. Interest-rate futures are close to discount a 100% chance the Fed will lower its benchmark rate by a quarter-percentage point to 4.50%. We also believe the Fed will cut 25 basis points but may be more hawkish in its statement than the market expectation, due to serious inflationary and liquidity issues from higher commodity prices.

Financial and Economic News and Comments

US & Canada

• US consumer confidence fell more than expected to 95.6 in October from a downwardly revised 99.5 in September and 105.6 in August, the Conference Board said. The present situation index fell to 118.8 in October from a downwardly revised 121.2 in September. The expectations gauge declined to 80.1 in October from 85 in September. The October more-than-forecast decline supports the case for the Federal Reserve to lower interest rates tomorrow.

Europe

• Bank of England MPC member Kate Barker questioned whether financial conditions have changed enough since the market turmoil in August to warrant an interest-rate cut. “We are asking ourselves if things are so different from August, and do we actually have to cut rates?” Barker said in an interview. She added the UK economy is in a slowdown rather than anything more serious.


• Germany’s unemployment rate fell to 8.7% in October, the lowest since May 1993, from 8.8% in September, the Federal Labor Agency said.


• The Swedish Riksbank raised its key interest rate from 3.75% to 4.00%.

Asia-Pacific

• Japan’s unemployment rate unexpectedly rose to 4.0% in September from 3.8% August and 3.6% in July, the Statistics Bureau said. The rising jobless rate is likely to delay the Bank of Japan’s normalization of interest rates. The Labor Ministry downgraded its assessment of the job market, saying the improvement in hiring “has weakened in recent months.”


• Japan’s household spending rose a stronger-than-expected 3.2% y/y, the Statistics Bureau said. However, the number was artificially strong as the September 2006 spending was weak (fell 6%).

FX Strategy Update