Expert Analysis of Today's Market

• The dollar traded mixed after disappointing US data Friday. Treasury Secretary Henry Paulson signaled the dollar will rebound from a record low. The yen pared some of its weekly advance as US stocks rebounded. The Canadian dollar rose from a 5-week low on higher commodity prices.


• The EUR/USD rose modestly but anchored in a relatively narrow range. In a well-defined uptrend, the pair is testing the resistance from the all-time high in the 1.47-area. If this resistance is broken, we expect a move to the upper trading band of the trading channel. On the other hand, if the lower band is broken, a big sell-off may occur as the pair is extremely overbought.

Financial and Economic News and Comments

US & Canada

• Federal Reserve Governor Randall Kroszner said the Federal Reserve is not inclined to cut interest rates further even if the US economy hits a “rough patch,” as he expects. “The current stance of monetary policy should help the economy get through the rough patch during the next year, with growth then likely to return to its longer-run sustainable rate,” Kroszner said.


• US industrial production unexpectedly fell in October as slowing sales prompted factories to make fewer automobiles and appliances. Industrial production declined 0.5% m/m in October, after a 0.2% m/m gain in September, the Fed. Capacity utilization fell to 81.7% from 82.2%. Overall the numbers indicate weakness in the manufacturing sector.

• Goldman Sachs believes the global credit-market slump may force banks, brokerages and hedge funds to cut lending by $2 trillion and trigger a “substantial recession” in the US. “The likely mortgage credit losses pose a significantly bigger macroeconomic risk than generally recognized. It is easy to see how such a shock could produce a substantial recession [or] a long period of very sluggish growth,” GS economist Jan Hatzius wrote. We believe the US is at a vulnerable position. Our leading economic index currently does not indicate a recession, but a new shock to the US economy could easily push the economy into a recession.

• Treasury Secretary Henry Paulson signaled to US trading partners that the dollar will rebound from a record low, predicting it will reflect “long-term strength” in the US economy. This is what the Canadian and European countries have been asking for and it may be an indication that the Bush administration is getting worried about the falling greenback. Paulson said: “I believe that we are going to continue to grow and that our economy is going to continue to grow….Its fundamental, long-term strengths will be reflected in currency markets.”


• Treasury International Capital report for September indicated capital flows recovered slightly from August but came in below the expectations. The report’s most comprehensive category, “monthly net TIC flows,” includes non-market flows, short-term securities and changes in banks’ dollar holdings. This measure of net foreign capital outflow was $14.7 billion in September, which is far below the record outflow of $150.7 billion in August.

Europe

• Europe’s trade deficit with China rose 25% in the eight months through August, giving European and US officials more reason to pressure China to let the yuan trade freely. The euro-area trade gap with China widened to €70 billion ($102 billion) from €55.9 billion in the year-earlier period, the European Union’s statistics office said.

Asia-Pacific

• Bank of Japan Deputy Governor Toshiro Muto said the US housing recession and financial-market turmoil could hurt the Japanese economy, making it “difficult” to decide when to raise interest rates.

FX Strategy Update