Expert Analysis of Today's Market

• The dollar rose against the euro and yen on Wednesday as equity markets rallied for a second day. The yen and Swiss franc fell versus most major currencies as carry trades resumed on increased risk appetite. Both US durable goods orders and existing home sales were slightly weaker than expected. Sterling and the dollar block currencies advanced. The Canadian dollar rebounded from a 7-week low.


• The EUR/USD fell for a second day. We expect a test of the lower band in the positive trading channel. If this is penetrated, the pair will fall significantly.

Financial and Economic News and Comments

US & Canada

• Federal Reserve Vice Chairman Donald Kohn said recent financial “turbulence” may reduce credit to businesses and consumers, suggesting he sees higher risks to economic growth than he did last month. “Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses.” Kohn said he won’t take narrowing the discount fed funds spread off the table, increasing our bets that the Federal Reserve will lower its fed funds rate by 25 basis points and discount rate by 50 basis points.


• US durable goods orders fell a more-than-forecast 0.4% m/m in October, after a 1.4% decrease in September, the Commerce Department said. The decline is the longest losing streak in more than three years. Excluding transportation, demand fell 0.7% m/m. The drop in total orders was led by an 8.4% m/m decline in demand for computers and electronic gear. However, the annual changes in orders indicate a healthier picture.

• US existing home sales dropped slightly more than expected in October to a 4.97 million annual rate, a 1.2% decrease from September’s revised 5.03 million annual pace, the National Association of Realtors said. Sales fell 20.7% y/y and the median home price was $207,800 in October, down 5.1% y/y the most on record. The number of homes for sale at the end of the month rose 1.9% to 4.45 million. At the current sales pace, that represented 10.8 months’ supply, compared with 10.4 months in September.

• The GfK AG index fell more than expected to the lowest since January 2006. GfK’s index for December fell to 4.3, from 4.8 in November, the GfK reported. A subindex measuring German households’ willingness to spend fell to the lowest since the summer of 2005.

Asia-Pacific

• Japan’s retail sales rose at the fastest pace in more than a year. Sales rose 0.8% y/y in October, a third monthly gain, the Ministry of Economy, Trade and Industry said.


• European Central Bank President Jean-Claude Trichet said China may allow the yuan to rise more against the euro even as Chinese officials signaled faster gains are unlikely.


• China’s Premier Wen Jiabao rejected changes to the nation’s exchange-rate system as the crucial method for narrowing the trade surplus with Europe. Wen reiterated pledges to gradually increase the flexibility and convertibility of the yuan.

FX Strategy Update