Expert Analysis of Today's Market

• The dollar rose against most key currencies on Wednesday on better-than-expected US data and ADP’s strong non-farm payroll forecast. Sterling fell after weaker-than-expected data on the UK service sector and house price. We believe the Bank of England will cut interest rates 25 basis points to 5.50% tomorrow as the spread between the BOE benchmark and the rate for borrowing pounds for three months is close to a record. The yen fell as risk appetite returned on global equity gains.


• The EUR/USD fell below the uptrend that started in August. This is a bearish indication. Strong support exists in the 1.45-1.46 area. If this is broken, it will indicate lower prices.

Financial and Economic News and Comments

US & Canada

• US private non-farm employment is likely to grow 189K in November, ADP Employer Services said. ADP data includes only private employment but does not include hiring by government agencies. The number is much higher than other estimates, but ADP’s predictions have been more accurately lately and there is little that indicates the labor market has deteriorated significantly lately.


• The Institute for Supply Management’s index of non-manufacturing businesses fell slightly more than forecast to 54.1 in November, the lowest level since March, from 55.8 in October. Employment decreased to 50.8 from 51.8, prices rose to 76.5 from 63.5, and new orders fell to 51.1 from 55.7. Employment and new orders are soft while prices are high. Overall the report indicates a continued expansion at a slower rate.

• US productivity in Q3 rose a stronger-than-expected 6.3% q/q annualized rate, the most since 2003, from a 2.2% pace in Q2, the Labor Department said. Unit labor costs in Q3 fell at a 2.0% q/q annualized rate, nearly the most since 2003. Productivity rose 2.7% y/y. Unit labor cost rose 3.0% y/y, signaling that compensation costs are contained.

• US factory orders increased a stronger-than-forecast 0.5% m/m and 5.0% y/y in October. Shipments rose 1% m/m and inventories increased a small 0.1% m/m.

Europe

• The Chartered Institute of Purchasing and Supply said its PMI service index for UK fell more than expected to 51.9 in November, the lowest since May 2003, from 53.1 in October.


• UK house prices fell 1.1% m/m to £194,895 ($400,000) in November, the third consecutive monthly fall since 1995, Halifax reported.


• Nationwide Building Society said its consumer confidence index fell 12 points to 86, the biggest drop since the index was introduced in May 2004, as faster inflation hurts Britons’ purchasing power.
• The PMI index for EMU services rose modestly to 54.1 in November from 53.8 in October. EMU retail sales declined 0.7% m/m in November; a drop of 0.3% was expected.

Asia-Pacific

• The Reserve Bank of Australia kept interest rates at 6.75% as expected but said global growth could ease in 2008. The RBA said the credit-market turmoil may contain inflation and slow global economic growth. Governor Glenn Stevens said the current stance on monetary policy should be maintained “for the time being.”


• China plans to shift to a tighter monetary policy in 2008 and the government may raise interest rates further and curtail bank lending, according to reports from an economic policy meeting of top Chinese leaders.

FX Strategy Update