Expert Analysis of Today's Market

• The dollar was lower versus the yen and euro on Tuesday but gained against sterling and the dollar-block currencies. The euro was boosted by stronger-than-expected EMU producer-price inflation. The yen gained against major currencies as worries about the credit crunch are deleveraging the global financial system. Part of this deleveraging is carry-trade unwinding. The Canadian dollar plunged as the Bank of Canada unexpectedly lowered interest rates 25 basis points to 4.25%.


• After briefly breaking its uptrend, the EUR/USD has risen again the last two trading days. This could be part of a topping formation. If the 1.45 support is broken, it will indicate lower prices. We are selling one unit of the EUR/USD and one unit of the USD/JPY.

• The dollar index has fallen dramatically. Trying to pick a bottom may be too risky. However, it is possible that the index could see some temporary relief. The index has broken the short-term downtrend. This could be the beginning of a short-term greenback rally. It is not only the US that is starting to see the fallout from the subprime debacle. Other central banks may soon have to start monetary policy easing to avoid economic downturns and export problems due to over-shooting exchange rates, as today’s Bank of Canada rate decision showed.

Financial and Economic News and Comments

US & Canada

• The Bank of Canada unexpectedly cut its target rate a quarter-percentage point to 4.25% and said it “now expects inflation over the next several months to be lower than was projected," The BOC cited "global financial market difficulties” and an “increased risk to the prospects for demand for Canadian exports.” The BOC still believes the economy is operating beyond full capacity.

• San Francisco Fed President Janet Yellen said financial conditions and consumer spending have deteriorated more than she expected in the past month, signaling she will possibly support cutting interest rates next week. “These developments necessitate some rethinking of my growth forecast, and have highlighted the downside skew in the risks to that forecast,” Yellen said.


• US Treasury Secretary Henry Paulson said he had no “silver bullet” to stop subprime-mortgage losses from spreading.

Europe

• EMU producer-price inflation accelerated in October to the fastest pace this year, boosted by strong energy and food cost increase. Producer prices rose a stronger-than-expected 3.3% y/y, the most since December 2006, the EU’s statistics office said.

• European Central Bank governing council member Christian Noyer questioned (rightly in our opinion) the notion that Europe could “decouple” from a US slowdown. He also said banks will be exposed to a “triple shock” of unwanted growth in their balance sheets, higher costs of capital and deterioration in credit quality, resulting in higher lending rates. How much the European economy suffers “will depend on how credit markets evolve in the period to come,” Noyer said. Europe’s economy may be more damaged than the European Union has forecast by fallout from the US housing slump as banks curb lending and accelerating price gains prevent central banks from cutting interest rates.

Asia-Pacific

• Australia’s retail sales growth slowed for a second consecutive month. Sales rose a less-than-expected 0.2% m/m in October from a revised 0.7% m/m increase in September, the Bureau of Statistics said.

FX Strategy Update