Expert Analysis of Today's Market

• The dollar traded mixed in thin trading Friday ahead of next week’s FOMC meeting and US employment report. The yen reversed earlier losses after the US stock market fell in early afternoon trading. The FX market continues to be dominated by the equity market, with the yen and to some extent the dollar benefiting from increased risk aversion.


• The EUR/USD fell modestly after unable to penetrate the 1.48-handle resistance. The pair was pressured by increased risk aversion and reduced bets that the Federal Reserve will cut interest rates 50 basis points next week. The EUR/USD is just above support in the 1.45-1.46 area. If this is broken, a test of the important 1.43- area support is likely.

Financial and Economic News and Comments

US & Canada

• The White House and Congress reached a deal on a stimulus plan. The centerpiece of the package is $100 billion in tax rebates for an estimated 117 million families. One provision raises the dollar limit on mortgages that can be bought or guaranteed by Fannie and Freddie Mac.


• Canada’s inflation rate eased in December. Overall inflation slowed to 2.4% y/y in December from 2.5% y/y in November, Statistics Canada reported. The core inflation rate fell 0.3% m/m but rose 1.5% y/y in December, below the Bank of Canada’s target of 2.0% y/y for a third straight month. Expectations are for a 25 basis-point BOC interest-rate cut; however, due to the benign core inflation, the BOC may cut rates 50 basis points to shield the Canadian economy from the credit squeeze.

Europe

• The GfK index of German consumer confidence for February was unchanged from January’s reading of 4.5. A modest decline was expected. GfK said it conducted this month’s survey before world equity markets plunged on January 21. The willingness-to-buy indicator rose to -8.8 from -10.7 and households were more optimistic about the economic outlook, with the business cycle expectation rising to 28.7 from 23.6. A measure of consumers’ income expectations fell to -4.7 from -1.7. “The overall trend is definitely pointing up,” said Klaus Wuebbenhorst, chief executive officer at GfK. However, we are not certain if the trend is up.

• European Central Bank council member Axel Weber said the upcoming German wage negotiations will be important for the inflation outlook. He said German inflation may fall below 2% in 2008 if no second round effects follow the sharp commodity increases. The ECB may have to follow “a more restrictive course than otherwise necessary” if it becomes clear wage settlements are taking a temporary jump in inflation into account, Weber said.

Asia-Pacific

• Japanese core consumer prices, which exclude fresh food, rose a stronger-than-expected 0.8% y/y in December, the Statistics Bureau said. Tokyo’s core prices increased 0.4% y/y in January, following a 0.3% y/y rise in December. Excluding energy and food, nationwide consumer prices fell 0.1% y/y in December and have not risen for nine years. Although inflation is still modest, the data will make it more difficult for the Bank of Japan to ease monetary conditions.

• Japan’s economy will keep expanding gradually, BOJ Governor Toshihiko Fukui said. Growth for the fiscal year ending March 31 “will probably be in the low 1 percent range” and the pace of the expansion will slow for the time-being and consumer price gains will accelerate, Fukui said. Growth will pick up in the year starting April 1 and exceed its potential rate, he added.

FX Strategy Update