Expert Analysis of Today's Market

• The FX market traded in a narrow range on Tuesday ahead of the Federal Reserve’s interest-rate decision tomorrow. The greenback strengthened somewhat against most key currencies after US durable goods orders rose more than forecast, indicating the US economy may avoid a recession. Durable goods are volatile but still indicate US economic strength. Traders reduced bets for a 3.0% Fed funds rate slightly. We believe the Fed will cut the target lending rate 50 basis points tomorrow as we think the FOMC do not want to disappoint a jittery stock market. Sterling gained on stronger-than-expected UK retail sails. The yen and Swiss franc fell against most key currencies as rising global equity prices prompted renewed interest in carry trades. The Australian dollar strengthened on improved risk appetite while the Canadian dollar fell as Canadian manufactures turned less optimistic increasing the chance of further Bank of Canada rate cuts.


• The EUR/USD continues to struggle at the 1.48-handle resistance. Trade is thin ahead of the FOMC rate decision. There is support at the 1.46 area. We do not expect any big move before the rate decision.

Financial and Economic News and Comments

US & Canada

• US durable goods orders rose a much stronger-than-expected 5.2% m/m to a seasonally adjusted $226.60 billion in December (1.6% expected), the Commerce Department said. Core capital goods orders (a proxy for business capital investment) rose a strong 4.4%. Overall a strong report and it may be an indication of improvement in business capital investments.


• The Conference Board’s index of confidence fell less than expected to 87.9 in January from 90.6 in December. The measure of present situation rose to 115.3 in January from 112.9 the prior month. However, the gauge of expectations for the next six months decreased to 69.6 from 75.8, indicating people are worried about future growth. This indicator shows the risk of recession is high.

• Home prices in 20 US metropolitan areas fell for the 11th consecutive month. Prices fell 2.1% m/m to leave a 7.7% y/y drop in November, after falling 6.1% y/y in October, the S&P/Case-Shiller home-price index showed. The decline is the biggest since the 20-city index was started in 2000.


• Canadian manufacturers are the least optimistic about their production prospects since January 2002. The percentage of factories in Canada predicting lower output in January rose to 33% from 24% in October, Statistic Canada reported. Manufacturers in 14 of 21 sectors tracked by the agency reported a negative outlook.


• The International Monetary Fund cut its forecast for global growth in 2008 to the weakest pace since 2003 as the US economy is expected to provide the primary drag on world growth. The IMF said the world economy will expand 4.1% in 2008, down from 4.9% in 2007 and below the 4.4% forecast in October. The IMF lowered its US growth forecast to 1.5% for 2008 from its previous forecast of 1.9%, and cut its euro-region estimate to 1.6% from 2.1%. The IMF said central banks should provide liquidity “as long as needed” to minimize the impact on growth from the financial turmoil. The IMF rejected the notion of “de-coupling” and IMF chief economist Simon Johnson said “no one is going to be exempt from some slowdown.”

Europe

• UK retail sales rose at the slowest pace in 14 months in January but were still better than expected. The Confederation of British Industry survey showed 39% of retailers sold more goods than a year earlier and 34% sold fewer. The net balance of 4 points was the lowest result since November 2006.

Asia-Pacific

• Japan’s unemployment rate stayed at 3.8% in December, the Statistics Bureau said. The ratio of jobs available to each applicant fell to a 2-year low of 0.98.


• Japanese retail sales decreased 0.1% y/y in 2007, the first yearly decline in 5 years, the Trade Ministry said.


• Australian business confidence fell 1 point in December from 5 in November, the lowest since October 2005, according to National Australia Bank Ltd. A reading above zero shows companies expecting their industry to improve outnumber those predicting deterioration.

FX Strategy Update