Expert Analysis of Today's Market

• The dollar fell against most key currencies on Monday on speculations the Federal Reserve will lower rates at least 50 basis points and that it may even happen before the January 29-30 Fed meeting. New reports of possible larger-than-expected credit related write-downs at Citibank and Merrill-Lynch also weighted on the greenback. Despite higher US equity market, the USD/JPY fell possibly due to that Japanese markets were closed for a holiday preventing Japanese retail demand for carry trades to pressure the yen. Sterling was little changed against the dollar but made a new record low versus the euro despite surging UK producer prices. The Australian dollar rose on rate hike speculations and rising gold prices. The Canadian dollar, little changed against the greenback, was mostly lower in cross trades. The Swiss franc rose to a new high despite Swiss National Bank Governing Board Chairman Jean-Pierre Roth said there are signs the Swiss economy is deteriorating rapidly. We buy the USD/CHF with stop at 1.08.


• The EUR/USD rose to a 7-week high on bets US rates will fall below eurozone rates for the first time in three years. The pair touched 1.4915, the strongest since the record high of 1.4966 on November 23, after breaking resistance at 1.48. We stopped out at 1.4860, but we are entering a new short position as we think the pair is close to a top. A test of the all-time high is likely, but we do not think the pair will rise above 1.50 as the EMU economy is starting to weaken.

Financial and Economic News and Comments

US & Canada

• Canadian executives said sales prospects and credit-market conditions in Q4 2007 were the worst in at least four years, a Bank of Canada survey showed. The share of companies expecting sales to slow in the next 12 months was tied at 38% with the share anticipating them to quicken. The survey results also indicate inflation may accelerate even as sales are forecast to slow. Sixty percent of executives said they would have “some” or “significant” difficulty filling unforeseen orders, the highest since that question was first asked in Q3 1999 according to the BOC’s quarterly Business Outlook Survey.

Europe

• The EMU industrial production fell a less-than-expected 0.5% m/m in November. The annual growth rate fell to 2.5% y/y in November from 3.7% y/y in October, Eurostat said.

• European Central Bank council member Klaus Liebscher said he sees “significant” upside risks to inflation.


• EU’s economic and monetary affairs commissioner Joaquin Alumina said the EUR/USD is close to historical limits and France’s EU affairs minister Jean-Pierre Jouyet said the speed of euro appreciation is a problem.


• UK producer output prices rose at fastest annual pace since 1991, making it more difficult for the Bank of England to spur growth by cutting interest rates. Manufacturing output prices rose 5.0% y/y and input prices rose 11.2% y/y in December, the Office for National Statistics said. Core producer prices were better behaved as core output prices rose 3.5% y/y and core input prices rose 2.6% y/y in December.

Asia-Pacific

• The yuan rose to the highest since a dollar peg was scrapped in 2005 as China pledged to extend efforts to slow the export-led economic expansion and curb inflation.

FX Strategy Update