Expert Analysis of Today's Market

• The dollar traded mostly lower on Tuesday on speculation interest rate differentials will widen particularly against the euro and Australian dollar. The euro and yen rose modestly, while the aussie rallied against all major currencies on hawkish Reserve Bank of Australia minutes. The Canadian dollar and sterling fell versus the dollar increasing speculation of further BOC and BOE interest-rate cuts after moderating inflation in Canada and BOE’s Tim Besley’s warnings about falling UK consumption.


• The AUD/USD rallied after the RBA said it considered a larger increase when raising borrowing costs to an 11-year high of 7.0% earlier this month. The pair is also supported by strong commodity prices. Resistance at 0.91 was broken and a test of the 0.94-handle resistance is expected. We think the test will fail as the aussie is getting oversold.

Financial and Economic News and Comments

US & Canada

• The National Association of Home Builders’ index for sales of new, single-family homes rose to 20 in February from 19 in January, the NAHB reported. Traffic picked up to 19 in February from 14 in January.

• Canada’s core inflation rose 1.4% y/y in January, compared to 1.5% y/y in December, below the Bank of Canada’s inflation target of 2%. Overall inflation slowed to 2.2% y/y in January from 2.4% y/y in December. On a monthly basis, prices declined 0.2% in January and the core index gained 0.1%, Statistics Canada reported. Meanwhile, Canadian wholesale sales fell a larger-than-expected 2.9% in December.

Europe

• Tim Besley, a member of the Bank of England’s monetary policy committee, said consumer spending is likely to slow significantly because of tighter credit conditions. Small increases in interest rates can significantly deter households from borrowing and spending. With credit conditions becoming much tighter, Besley agreed with the BOE’s assessment that consumption growth would be “very weak” in 2008.

Asia-Pacific

• The Reserve Bank of Australia February 5 minutes revealed that its board members considered raising the benchmark interest rate by 50 basis points for the first time in eight years at its February 5 interest rate decision. “The debate focused on whether the change in the cash rate should be 25 or 50 basis points….The judgment was finely balanced,” with the board deciding “the case for the 25 basis point rise was, at this time, the more persuasive….Members were strongly of the view that a significant slowing in demand from the pace observed through 2007 would be required for inflation to return to the target” range of between 2% and 3%, the RBA minutes showed.


• China’s consumer prices surged 7.1% y/y in January, up from 6.5% y/y in December, after heavy snowstorms in late January froze power grids and shut down road and rail transportation across much of southern and central China. The severe shortages of daily necessities pushed the monthly inflation rate to its highest level since September 1996. China’s inflation is mostly related to strong food price inflation; food prices rose 18.2% y/y. Inflation in goods excluding food increased 1.5% y/y.

FX Strategy Update