Expert Analysis of Today's Market

• The dollar was little changed against most key currencies but rose modestly against the yen and sterling after the European Central Bank loaned a record $500 billion for two weeks at 4.21% to ease the credit market squeeze. Sterling was pressured by speculation the Bank of England may cut interest rates again after inflation was lower than expected. The yen declined as the ECB’s massive injection spurred carry trades.


• The EUR/USD was little changed after the aggressive ECB measure. After having broken the uptrend that started in September, the pair may be in a topping formation that will lead to a reversal in its 5-year bull-run.

Financial and Economic News and Comments

US & Canada

• US housing starts fell 3.7% m/m in November to 1.187 million units at an annual rate, slightly above consensus expectations of a 1.176 million rate. Starts are down 24.2% versus a year ago and off 48.2% from the peak in January 2006. The South and Midwest region were little changed while the Northeast and West declined. New building permits decreased 1.5% in November, the smallest drop in six months, to 1.152 million units at an annual rate, slightly above consensus expectations. The housing market is falling at a slower rate, but it still too early to call for a bottom in this sector.

• The Federal Reserve Board voted unanimously to propose new restrictions on subprime mortgages, including a ban on low-documentation loans and limits on penalties for borrowers who prepay their debts. “Mortgagemarket discipline has in some cases broken down and the incentives to follow prudent lending procedures have, at times, eroded,” Fed Chairman Ben S. Bernanke said.


• Canada’s core consumer price inflation increased a less-than-expected 1.6% y/y in November, the slowest since April 2006, compared with 1.8% y/y in October. The all-items index rose to 2.5% y/y in November from 2.4% y/y in October.

Europe

• The 2-week interbank borrowing cost in euros plunged after the European Central Bank injected an unprecedented $500 billion in the banking system. The ECB rate was 4.21% and aimed at increasing liquidity at yearend. The massive injection indicates that the ECB is aware of the asset deflation risked posted by the liquidity squeeze. The amount banks charge each other for 2-week loans in euros dropped a record 50 basis points to 4.45%, the European Banking Federation said.


• UK’s inflation rate remained at 2.1% y/y and rose 0.3% m/m in November, the Office for National Statistics said. Expectations were for a 2.2% y/y increase. The lower-than-expected inflation is increasing speculation the Bank of England will ease monetary policy. The core inflation remained at 1.5% y/y.

Asia-Pacific

• Reserve Bank of Australia board members decided against raising the benchmark interest rate two weeks ago because the global credit rout had increased the cost of lending, today’s RBA minutes showed. “Members indicated that, absent the changes in market yields since the November meeting, there would have been a strong case on domestic grounds for a rise in the cash rate,” the RBA said in the minutes from its Dec. 4 policy meeting.


• The Japanese Cabinet Office said the economy is recovering despite some weakness. It upgraded its view on capital spending and downgraded its outlook for corporate earnings. In its monthly economic report for December, the government kept its overall view that the economy will expand. “We are watching Japan’s economic trends more carefully....We are watching worsening consumer sentiment with some concern,” Economic and Fiscal Policy Minister Hiroko Ota said.

FX Strategy Update