Expert Analysis of Today's Market

• The dollar traded mixed on Tuesday. The yen was supported by continued carry-trade unwinding as international equity prices fell. The euro was moderately higher despite European finance ministers’ concerns over the rising euro and weak European GDP. However, EMU producer prices accelerated, suggesting the euro area still has an inflation problem. The Canadian dollar fell after the Bank of Canada cut its benchmark interest rate by more-than-expected 50 basis points to 3.5% and said further “stimulus” will likely be required.


• The Reserve Bank of Australia raised its benchmark interest rate by 25 basis points to a 12-year high of 7.25%; however, the AUD/USD fell following RBA Governor Glenn Stevens’ dovish remark that there is evidence Australian consumer spending is moderating. After making a new high last week, the pair is extremely overbought and likely to be pressured by carry-trade unwinding. There are strong support at the 0.92-area and stronger support at the 0.90.

Financial and Economic News and Comments

US & Canada

• Federal Reserve Chairman Ben S. Bernanke urged lenders to expand mortgage writedowns for borrowers whose home values have declined. “Efforts by both government and private-sector entities to reduce unnecessary foreclosures are helping, but more can, and should, be done,” Bernanke said. “Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure.” He believes delinquencies and foreclosures are likely to continue to rise for “a while longer.”


• The Bank of Canada cut its benchmark interest rate by larger-than-expected 50 basis points to 3.5% and indicated the BOC will have to act again to offset a slump in exports to the US. “Further monetary stimulus is likely to be required in the near term,” the BOC said. “There are clear signs that the US economy is likely to experience a deeper and more prolonged slowdown than had been projected,” which will have “significant spillover effects on the global economy,” the BOC said.

Europe

• The EMU PPI rose 0.8% m/m and 4.9% y/y in January, Eurostat reported, making it difficult for the European Central Bank to cut interest rates.

• The EMU GDP rose a revised 0.4% q/q and 2.2% y/y in Q4 2007, down from 2.6% in Q3, Eurostat said. The detailed breakdown of the Q4 GDP show that consumer spending in the euro area fell 0.1% q/q in Q4, the first decline since 2001, from 0.5% q/q in Q3, business investment growth slowed to 0.8% q/q in Q4 from 1.2% q/q in Q3, and government spending slipped 0.1% q/q in Q4. Exports rose 0.5% q/q in Q4, down from 2.1% q/q in Q3.

• European finance ministers said they are “increasingly concerned” the euro’s advance to a record against the dollar risks deepening the economic slowdown in the region. Luxembourg’s Prime and Finance Minister Jean- Claude Juncker said “in the present circumstances we say we are concerned about excessive exchange rate moves. Existing exchange rates do not give an adequate reflection to the fundamentals.” Belgian Finance Minister Didier Reynders said “we’re afraid to see the evolution of the exchange rate.”

Asia-Pacific

• The Reserve Bank of Australia increased its benchmark interest rate by 25 basis points to 7.25% but sounded slightly less hawkish than expected. “Having weighed both the international and domestic information available, the board concluded that a further tightening in monetary policy was needed to secure an inflation rate of 2 percent to 3 percent over time,” RBA Governor Glenn Stevens said. “Overall tightening in financial conditions since the middle of 2007 is substantial.” There is also “tentative evidence that some moderation in household demand is beginning to occur,” he added.


• Japan’s Economic and Fiscal Policy Minister Hiroko Ota said an abrupt strengthening of the yen could hurt corporate profits. “The yen has been strengthening rapidly,” Ota said. “We’re concerned about the effect that could have on corporate profits.”

FX Strategy Update