Expert Analysis of Today's Market

• The dollar fell against most major currencies after weaker-than-expected manufacturing data spurred concerns the US economy is falling into a recession and the Federal Reserve may lower interest rates further. Sterling rallied on stronger-than-expected UK retail sales easing Bank of England rate cut speculations. The dollar block currencies were little changed. The yen and Swiss franc rose on increased risk aversion as US equity prices dropped.


• After breaking the 1.47 resistance, the EUR/USD looks likely to test its all-time high at 1.4966. The European commission’s lower growth and higher inflation forecast for the EMU did not stop the pair’s advance. The European Central Bank with its single mandate of price stability is believed to hold out longer than the Fed before caving in to rate cut demands. Supports exist in the 1.47 and 1.45 areas. We think the all-time-high resistance will hold and that the EUR/USD is making a significant top. However, if the resistance is broken, the pair will rally.

Financial and Economic News and Comments

US & Canada

• The Philadelphia Fed’s manufacturing index fell to -24.0 in February, the weakest reading since the recession of 2001, versus -20.9 in January. New orders index rose to -10.9 in February from -15.2 in January, while the future number of employees component plunged to -8.8 in February from 18.8 in January. The inflationary pressures were still significant, though the prices paid index eased a bit to 46.6 in February from 49.8 in January.

• The Conference Board’s leading economic index for the US economy fell in January for the fourth consecutive month. The index declined 0.1% m/m in January after decreasing a revised 0.1% in December. Last month’s drop in the index brings the decline for the last six months to 2%, which according to the Conference Board is a “reasonable criteria for a recession warning.”


• US initial jobless claims fell 9,000 to 349,000 in the week ended February 16 after the previous week’s figures were revised higher, the Labor Department said. The four-week moving average of claims rose to 360,500, the highest since October 2005. The number of people continuing to collect benefits rose to 2.784 million in the week ended February 9, from 2.736 million a week earlier. Despite the drop in the weekly claims, the overall labor market looks sluggish as both the less volatile four-week moving average and the continuing claims keep rising indicating increasing risk of a US recession.

Europe

• UK retail sales rose a stronger-than-expected 0.8% m/m in January, the biggest increase in 11 months, following a 0.2% m/m decline in December, the Office for National Statistics said. The retail price deflator fell for a seventh month, showing a 1.2% decline.


• The European Commission cut its forecast for EMU economic growth and predicted the fastest inflation since the start of the euro, highlighting the dilemma facing not only the European Central Bank but most central banks. The European Commission said the EMU economy will expand 1.8% in 2007, down from 2.2% growth predicted in November. Inflation will average 2.6%, up from the previous 2.1% estimate and the fastest since the euro was introduced in 1999, the European Commission predicted.

Asia-Pacific

• Japan’s export growth rose a stronger-than-expected 7.7% y/y in January after increasing 6.9% y/y in December, the Finance Ministry said. Exports to Europe, Asia, and China rose, while US exports fell. Imports rose 9.0% in January due to higher oil costs causing a trade deficit of ¥79.3 billion ($734 million).

FX Strategy Update