Expert Analysis of Today's Market

• The dollar fell against the European currencies and yen on Thursday after Federal Reserve Chairman Ben S. Bernanke said the US economy is likely to “slow noticeably” this quarter while high commodity prices and a weaker dollar may stoke inflation. The yen rose on increased risk aversion as US stocks fell. The unwinding of carry trades was strong; the commodity currencies particularly the Australian and Canadian dollars even declined against the greenback. Sterling traded at the highest level since 1981 after the Bank of England left interest rates unchanged at 5.75%.


• The USD/JPY broke support, pressured by the increased risk aversion as equity markets fell on renewed worries of the US economic outlook after Bernanke’s growth and inflation warnings. In a downtrend, the pair shows signs of further downward pressure from a big head-and-shoulder formation.

Financial and Economic News and Comments

US & Canada

• Federal Reserve Chairman Ben S. Bernanke said that while the most recent data suggest a “resilient” economy, growth is likely to “slow noticeably” in Q4 and into 2008 as the housing slump intensifies. He said the US inflation outlook is “subject to important upside risks” from prices of crude oil and other commodities and the weaker dollar. “These factors were likely to increase overall inflation in the short run and, should inflation expectations become unmoored, had the potential to boost inflation in the longer run as well.” The Federal Open Market Committee saw risks to both growth and prices at its October 31 meeting, when they cut interest rates by a quarter-point to 4.5%. Bernanke added the Fed “will be very dependent on the data” and “will respond as needed” to keep growth and inflation stable.


• US initial jobless claims fell by 13,000 last week to 317,000, the lowest level in a month, the Labor Department said. Wildfires in California added 3,000 to jobless claims. The four-week average of new claims increased by 2,000 to 329,750, the highest level since the week of April 21. The four-week average of continuing claims rose by 16,000 to 2.55 million. Despite numerous layoffs in the mortgage industry in the past three months, reported jobless claims have been steady, indicating a healthy job market.

Europe

• The European Central Bank left its benchmark refinancing rate at 4.0%, as expected. After the decision, ECB President Jean-Claude Trichet said the ECB remains ready to act to counter mounting euro zone inflation risks. “The information that has become available since our previous meeting fully confirms that the outlook for price stability over the medium term is subject to upside risks,” Trichet said, adding that “the economic fundamentals of the euro area remain sound and support a favourable medium-term outlook for economic activity.” However, he said “given the continued uncertainty, additional information is needed before further conclusions for monetary policy can be drawn.” We believe the ECB will keep interest rates on hold at its next meeting as Trichet did not use his codeword for raising rates “vigilance.”

Asia-Pacific

• Australian employment rose a less-than-expected 12,900 in October, following a revised 8,300 gain in September, the Bureau of Statistics said. The jobless rate edged up to 4.3% from a 33-year low of 4.2%.


• Japan’s machinery orders fell a stronger-than-expected 7.6% m/m to ¥958.7 billion ($8.5 billion) in September, the lowest since May 2005, the Cabinet Office said.

FX Strategy Update