Expert Analysis of Today's Market

• The dollar fell modestly against most key currencies on Tuesday on speculation the Federal Reserve will cut interest rates by 50 basis points at the January 30 FOMC meeting. The yen recouped overnight losses after the US equity market fell in afternoon trading. Sterling was supported by a surprise increase in Halifax house prices index. The Australian dollar rose in reaction to a report of a sharp rise in Australia’s building approvals. The Canadian dollar was strengthened by higher commodity prices and gold prices. Gold prices hit a record high of $884 an ounce.


• The EUR/USD traded modestly higher today. The pair has been unable to break resistance at 1.48 despite increasing speculation the Fed will aggressively lower interest rates to avoid a recession. Expectations of a 50 basis-point cut have increased to nearly 70%. However, the pair has been pressured by rising price pressures, as acknowledged by Philadelphia Fed President Charles Plosser today as he sees “worrisome signs of underlying price pressures.”

Financial and Economic News and Comments

US & Canada

• The index of pending home sales decreased 2.6% m/m in November, following an upwardly revised 3.7% m/m in October, the National Association of Realtors said. The index is down over 18% y/y.

• US Treasury Secretary Henry Paulson said the housing slump will continue, and a program aimed at heading off a wave of foreclosures may need to be expanded beyond subprime borrowers. “There is no evidence it is bottoming,” Paulson said. “The evidence would be that it has further to run.”


• The odds of a 50 basis-point Fed rate cut on January 30 have increased to 68%, up from nearly 0% chance before the weak unemployment last week, according to interest rate futures.


• Philadelphia Fed President Charles Plosser said further rate cuts may be needed if the outlook for US economic growth become “substantially weaker” than already projected. “A substantially weaker outlook than expected, particularly if that weakness is projected to be more prolonged than anticipated, may require further adjustments to policy,” Plosser said. However, he said it is not clear if economy will weaken further. He also indicated he is worried about inflation, saying “I see more worrisome signs of underlying price pressures….inflation expectations are more fragile now than they were six months ago.”

Europe

• EMU retail sales fell 0.5% m/m in November, the second month of declines, Eurostat said.


• German factory orders unexpectedly rose 3.4% m/m in November; a 1.8% m/m decline was expected.


• The average cost of a UK home increased 1.3% m/m in December after declining a revised 1.3% m/m in November, HBOS Plc said. Prices fell 0.8% q/q in Q4, the first drop since 2000.


• Revenue at stores open at least 12 months increased 0.3% y/y in December, the weakest since December 2004, the British Retail Consortium said.

Asia-Pacific

• Australia’s home-building approvals unexpectedly rose 8.9% m/m in November following a 3.6% m/m drop in October. Approvals to build private houses increased 0.3% m/m to 9,340 in November, today’s report showed. Approvals for apartments and renovations advanced 28.4% to 4,882.

FX Strategy Update