Expert Analysis of Today's Market

• The dollar fell against major currencies on Thursday. The EUR/USD hit its highest level since January 2005 after the European Central Bank kept its benchmark interest rates unchanged at 3.75% despite ECB President Jean-Claude Trichet’s less hawkish tone at the press conference. The yen rebounded from a record low versus the euro after Trichet said currency rates should reflect a recovery in Japan’s economy. The Canadian dollar rose to the highest since November as prices of Canada’s main commodity exports advanced.


• The EUR/USD rose to a 27-month high. Our short position stopped out at 1.3470. The trend and momentum are up, but the pair is extremely overbought. We think a test of the all-time high at 1.36 is probable. This is likely to form a double top with bearish implication for the pair. However, the risk is protectionist rumbles may get out of hand and lead to a slumping dollar.

Financial and Economic News and Comments

US & Canada

• The minutes of the Federal Open Market Committee’s last policy meeting, released yesterday, said Fed officials agreed tighter credit may “prove necessary.” The minutes did not refer to lower borrowing costs, saying the risk had increased that inflation would not slow as the Fed had forecast.


• US import prices rose 1.7% m/m and 2.8% y/y in March, the US Labor Department said. Ex-petrol import prices rose 0.3% m/m and 2.9% y/y. Export prices increased 0.7% m/m and 5.3% y/y; export prices exagricultural increased 0.6% m/m and 4.2% y/y. Export prices are rising at a significantly higher rate than import prices.


• US initial jobless claims rose a stronger-than-expected 19K to 342K in the week of April 7, the US Labor Department said. Continued claims rose 38K as the 4-week average fell to the lowest level in eight weeks.

Europe

• The European Central Bank kept its benchmark interest rate at 3.75%, as expected, after seven 25-basis-point increases since late 2005.


• ECB President Jean-Claude Trichet did not use the word “vigilance,” a codeword signaling an ECB interest rate hike at the next meeting. However, Trichet said he would not alter expectations that policy makers will raise their benchmark interest rate in June. He asserted the ECB will act in a “firm and timely” manner to prevent a pickup in inflation, which has exceeded the ECB’s 2% target every year since 1999. “Our monetary policy continues to be on the accommodative side” and the inflation outlook “remains subject to upside risks,” Trichet said. His comments possibly mean the ECB will not raise rates in May, but the possibility of a rate hike in June will be data-dependent.


• Britain’s trade deficit widened to a larger-than-expected £6.8 billion ($13.4 billion) in February, up from a revised £6.4 billion in January, the government said.

Asia-Pacific

• Japan’s machinery orders fell a more-than-expected 5.2% m/m in February. Non-government orders, excluding shipping and utilities, declined to ¥1.04 trillion ($8.7 billion) in February, following January’s 3.9% m/m rise, the Cabinet Office said.


• Japan’s current account surplus widened 4.9% y/y to ¥2.42 trillion ($20 billion) in February, the Ministry of Finance said.

FX Strategy Update