Expert Analysis of Today's Market

• The dollar was mixed in New York trading Friday on continued worries of US growth and interest rate outlook. Another theme is carry-trade unwinding as equity prices fell. No major US economic data was released today. Sterling rose for the second day following yesterday’s stronger-than-expected UK retail sales easing Bank of England rate cut speculations. The Canadian dollar fell after a report showed retail sales in December were weaker than forecast. The yen and Swiss franc rose on increased risk aversion as US equity prices declined. The USD/JPY and equity prices are highly correlated. The stock market is at significant support; if this is broken, the USD/JPY will fall dramatically. The Australian dollar was supported by optimism the interest-yield differential will continue to widen but pared gains on falling US equity prices.


• The EUR/USD was modestly higher after mixed EMU economic data; EMU PMI rose more than expected but industrial orders were weak. The pair is close to a 3-week high on speculation the Federal Reserve will cut its Fed fund rate to stave off a recession while the European Central Bank may keep rates on hold. There are support at the 1.47-handle and resistance at the all-time high. A penetration of this resistance would lead to a big EUR/USD rally.

Financial and Economic News and Comments

US & Canada

• Canadian retail sales rose 0.6% m/m to C$35.1 billion ($34.7 billion) in December, following a 0.9% m/m gain in November, Statistics Canada reported. Clothing and accessory sales fell 2.7% m/m in December, while food and beverage sales declined 0.8%. Sales at new car dealers rose 4.4%, partly due to rebates and incentives. Excluding automotive-related goods, retail sales unexpectedly fell 0.4% m/m, the first decline in five months.

Europe

• The EMU services purchasing managers’ index rose more than expected to 52.3 in February from 50.6 in January. The manufacturing PMI fell slightly to 52.3 in February from 52.8 in January. Overall, the composite PMI rose to 52.7 in February from 51.8 in January. The numbers still indicate slow growth in the eurozone as the PMI trend is still down.

• Eurozone industrial orders fell a more-than-forecast 3.6% in December, Eurostat reported. This indicates weaker production in the spring.

Asia-Pacific

• Bank of Japan Governor Toshihiko Fukui said US economic growth could slow down further due to remaining weakness in the US housing sector, and that a drop in housing investment has also slowed Japan’s economy. However, he still maintained that Japan has a “favorable growth cycle of industrial production, income and expenditure.”


• The People’s Bank of China said in its Q4 monetary policy report that the PBC expects China’s consumer price index to continue to rise rapidly in H1 2008, noting that inflationary pressures could keep rising for some time. The PBC also said GDP growth is likely to slow this year and it will use interest rates to curb demand growth and stabilize inflationary expectations.

FX Strategy Update