Expert Analysis of Today's Market

• The greenback extended losses versus most key currencies on Wednesday after the Federal Open Market Committee cut interest rates 25 basis points and indicated it would not cut rates further. Despite the Fed’s hawkish statement and better-than-expected US growth numbers, the dollar continued to lose ground as the European, Canadian and Australian releases indicated those countries’ central banks may need to raise rates. The yen fell against the greenback and other major currencies after the Bank of Japan left interest rates unchanged and downgraded the Japanese economic outlook. Increased interests in carry trades also pressured the yen.


• The EUR/USD touched a record high on speculation the US interest and growth differentials will deteriorate. The pair is overbought but does not appear to go lower. We moved up the target and stop.

Financial and Economic News and Comments

US & Canada

• The Federal Reserve cut its benchmark interest rate by 25 basis points to 4.5% and its discount rate to 5.0% and signaled it is reluctant to reduce borrowing costs further.


• The FOMC said today’s action should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets. “After this action, the upside risks to inflation roughly balance the downside risks to growth.”


• ADP estimated private payroll growth to 106K in October. If government employment increases 25K, the nonfarm payroll will grow about 130K, which would be the strongest growth since May. ADP has recently underestimated employment growth so Friday’s job report may be an upside surprise.

• The US economy grew faster than expected in Q3 as increases in exports, consumer spending and business investment made up for another plunge in home construction. GDP rose at a seasonally adjusted 3.9% q/q annual rate and 2.6% y/y in Q3, the Commerce Department said. GDP climbed at a 3.8% q/q pace in Q2 and 0.6% in Q1. Residential fixed investment fell 20.1%, reducing overall GDP by 1.05 percentage points. Consumer spending rose 3.0%, increasing overall GDP by 2.11 in Q3. International trade contributed 0.93 percentage point to Q3 GDP. US exports surged 16.2% and imports increased 5.2%.

• The US construction spending in September unexpectedly rose 0.3% at a seasonally adjusted annual rate of $1.163 trillion, the first monthly gain in four months, the Commerce Department said.


• The manufacturing activity in the Chicago area unexpectedly contracted in October. The National Association of Purchasing Management said the overall indicator fell to 49.7 in October from 54.2 in September. The production index fell to 46.9 from 58.3, and the new orders gauge declined to 53.9 from 56.2. The inventories index increased to 49.6 from 38.2. Prices paid for raw materials jumped to 74.7 from 59. The employment index fell to 49.5 from 52.

Europe

• The EMU inflation rate rose a stronger-than-expected 2.6% in October following 2.1% in September, the European Union’s statistics office said. An 8% jump in the oil price since mid-January is fueling inflation, which the European Central Bank aims to keep below 2%. The increase should rule out any ECB interest-rate cut speculation for the foreseeable future.

• The EMU unemployment fell to 7.3% in September from 7.4% in August, the lowest since 1993, Eurostat reported.


• The UK consumer confidence fell to -8 in October, in line with expectations, from -7 in September, Gfk/NOP said. The survey found that its sub index consumers’ willingness to make major purchase fell to -5 from -3, the lowest level since December 1995. However, consumers’ economic outlook improved slightly during October, with the index for their assessment of the general economic situation over the next 12 months rising to -17 from -19. Consumers’ assessment of their personal financial situation also improved, rising to +13 from +12.

Asia-Pacific

• The Bank of Japan, with an 8-1 vote, kept its policy rate target unchanged at 0.5%, reflecting weakness in the Japanese economy and uncertainty from the US subprime-mortgage trouble. The BOJ also lowered its growth and inflation forecasts for the current fiscal year, as expected. “Downside risks are increasing,” Governor Toshihiko Fukui said after the meeting.


• Australia’s home-building approvals rose a stronger-than-expected 6.8% in September, to a 14-month high, the Bureau of Statistics said. Lending to consumers and businesses rose a more-than-expected 1.2% in September, according to the Reserve Bank of Australia. The strong numbers are adding to speculation the RBA will raise interest rates next week.

FX Strategy Update