Expert Analysis of Today's Market

• In NY trading Tuesday, the dollar fell to a record low against the euro and Swiss franc on speculation of deepening credit crunch, prompting the Federal Reserve to lower interest rates. The Federal Open Market Committee members predicted growth could slow next year to as low as 1.8%, according to the Fed October minutes released today. The dollar also fell against the pound and yen and the dollar-block currencies were little changed. The yen was weak overnight following stock market gains in Asia and Europe but strengthened as stock gains evaporated on Freddie Mac’s poor results that provided investors with yet another unwelcome reminder of the scope of the credit crunch.


• The EUR/USD hit a fresh all-time high supported by expectations the Fed will cut interest rates again next month. In a well-defined uptrend, the pair penetrated resistance. This indicates the pair will move higher in the established trading channel. On the other hand, the pair is overbought with extremely bullish sentiment; thus, long positions should be accompanied by narrow stops as a break of the lower band of the trading channel could lead to a big sell-off.

Financial and Economic News and Comments

US & Canada

• The minutes of the Federal Open Market Committee’s Oct. 30-31 meeting showed the FOMC saw risks to US economic growth as officials dwelled extensively on the economy’s vulnerabilities suggesting the committee sees the risk of a recession bigger than the risk of inflation. “Most members saw substantial downside risks to the economic outlook and judged that an interest-rate reduction at this meeting would provide valuable additional insurance against an unexpectedly severe weakening in economic activity,” according to the minutes.


• US housing starts rose 3.0% m/m to a seasonally adjusted 1.229 million annual rate in October, after falling 11.4% m/m in September to 1.193 million, the Commerce Department said. However, permits fell 6.6% m/m to 1.178 million pace, the lowest since 1993. Construction of single-family homes fell 7.3% to the lowest since October 1991, while multifamily home building surged 44% reversing a large drop in September. Housing starts were stronger than expected while permits were weaker than expected. Starts are down 16.4% y/y and permits are down 22.5% y/y. Stability in housing starts may still be a year away.

• The Canadian inflation rate unexpectedly fell in October, bringing annual core inflation below the Bank of Canada’s target for the first time since June 2006, as the costs of gasoline and passenger vehicles fell. The overall consumer price index fell 0.3% m/m and rose 2.4% y/y in October, slowing from a pace of 2.5% y/y in September. Core inflation unexpectedly declined 0.2% m/m and rose 1.8% y/y in October, the slowest rate since June 2006.

Europe

• French President Nicolas Sarkozy said he will not abandon his plan to roll back pension privileges for transport and energy workers, urging the end of a strike that has impeded service for seven days.

Asia-Pacific

• Fan Gang, a People’s Bank of China monetary policy committee member, said sharp increases in the yuan’s value would trigger “large speculative capital inflows and outflows that will kill China’s growth and financial stability.”

FX Strategy Update