Expert Analysis of Today's Market

• The greenback was little changed on Friday with sterling the only big mover. Sterling fell after a report showed UK retail sales unexpectedly fell in December. The drop in sales revived speculation the Bank of England will cut interest rates in February. The theme in the FX market this week has been the increased risk aversion and carry-trade unwinding. The yen rose on increased risk aversion as the US equity market sold off again. The Australian dollar did not rally despite hawkish comments by Reserve Bank of Australia Governor Glenn Stevens. Both the Canadian and Australian dollars were pressured by a weakening global commodity boom. The Baltic freight index, a good leading indicator for commodity prices, was down about 30% since its peak in November.


• The EUR/USD fell modestly on mixed US economic news that the US consumer sentiment unexpectedly increased but the US leading economic index fell slightly more than expected. President George W. Bush stimulus plan did little to relieve recession fears. There are support at the 1.46-area and resistance in the 1.48-area. The pair would be vulnerable to any indications of ECB interest-rate cuts.

Financial and Economic News and Comments

US & Canada

• President George W. Bush said an economic growth package of about $150 billion is needed “as soon as possible” to keep the US economy growing. The stimulus plan should include tax incentives for businesses and “direct and rapid income tax relief for the American people,” Bush said. There were no surprises in Bush’s announcement or more specific details that encouraged investors.


• The Reuters/University of Michigan preliminary index of consumer sentiment unexpectedly rose to 80.5 in January from 75.5 in December. The expectations index rose to 69.1 from 65.6. The current conditions index gained to 98.1 from 91.

• The Conference Board’s leading economic index fell 0.2% m/m in December. A 0.1% m/m drop was expected. The index indicates a slowing US economy in the first half of 2008 but not a recession.


• Richmond Fed President Jeffrey Lacker, one of the most hawkish Fed Presidents, said growth is “very weak” and may warrant additional interest-rate cuts.

Europe

• UK retail sales unexpectedly dropped 0.4% m/m in December, following a 0.4% m/m increase in November, the Office for National Statistics said. In 2007, sales rose just 2.7% y/y in nominal terms and 1.7% inflation adjusted.

• A European Central Bank survey of financial institutions showed that banks’ willingness to lend “is expected to continue to be affected over the next three months” by turmoil in the financial markets. Banks also expect “difficult” wholesale funding conditions to continue, the ECB reported. The survey shows credit to tighten in Q1. Net loan demand to companies and private individuals fell in Q4 and are expected to soften further in Q1. The possibility of ECB interest-rate hikes in the near future is slim.

Asia-Pacific

• Reserve Bank of Australia Governor Glenn Stevens said there is no credit crunch in Australia but inflation is uncomfortably high. “There is no evidence of a credit crunch in the domestic financial sector,'' Stevens said in a speech. “While we have to be careful to ensure ample liquidity” in Australia’s money market, “we remain concerned about the outlook for inflation, which is likely to be uncomfortably high in the near term.”


• Following a question, Stevens implied he is not worried about the high level of the Australian dollar. “Am I concerned about the impact of the (Australian) dollar? I don’t wish to comment on exchange rates,” Stevens said. “But with terms of trade at a 50-year high, full employment and inflation above target, I’m not that distressed about the currency.”


• Japan’s consumer confidence dropped to 38.0 December, its lowest level in more than four years, from 39.8 in November, the Cabinet Office said.

FX Strategy Update