Expert Analysis of Today's Market

• The dollar reversed overnight losses against most key currencies after the Federal Reserve announced Tuesday it will increase its security lending program by as much as $200 billion and accept mortgage papers as collateral in an attempt to more directly address the cease up in credit markets. The Fed will also increase swap lines with foreign central banks. The Fed’s move makes it less likely the Fed will cut its benchmark interest rate before the March 18 Fed meeting. We think the chance of a 50 basis-point cut is more likely than a 75 basis-point cut. The Fed’s more direct approach and decision to accept mortgage backed securities may let the Fed ease less as the credit crunch will be more directly addressed. This should, if it works, be less inflationary, less bullish for commodity and help the dollar. The move led to a short-covering rally in stocks and decreased risk aversion, which pressured the yen and Swiss franc.


• The EUR/USD reached a new all-time high after the ZEW index showed German investors were more optimistic about the German economic condition. However, the pair reversed its gain following the Fed announcement. The pair is still in an uptrend but overbought. There are resistance at the 1.55-handle and support at the 1.53. If this support is broken, the pair is likely to test the 1.49-1.50 area.

Financial and Economic News and Comments

US & Canada

• The Federal Reserve announced it is expanding its securities lending program to channel liquidity more directly to credit markets. The Fed said it will hold auctions to lend as much as $200 billion in Treasury securities and increase swap lines with two foreign central banks to try to ease renewed turmoil in credit markets. The Fed plans to make the loans in exchange for private mortgage-backed securities and other debt that has plunged in value. Securities will be made available to primary dealers through an auction process. The FOMC has also authorized increases in its temporary reciprocal currency arrangements with other central banks.


• The US trade deficit widened a less-than-expected 0.6% to $58.2 billion in January from a downwardly revised $57.9 billion in December, the Commerce Department said. Exports rose 1.6% m/m to a record $148.2 billion in January. Exports rose 16.6% y/y. Imports increased 1.3% to $206.4 billion, the highest ever on higher energy costs. Imports rose 11.9% y/y. Excluding petroleum, the $32.1 billion trade gap was the smallest since October 2002.

• Canada’s trade surplus widened to a larger-than-expected C$3.26 billion ($3.28 billion) in January after reaching a 9-year low in December. Exports rose 3.6% m/m, led by record shipments of petroleum products. Imports increased 1.0% m/m.

Europe

• The ZEW’s German investor economic expectations index increased more than expected to -32.0 in March from -39.5 in February. The gauge reached a 15-year low of -41.6 in January. The current economic situation index fell to 32.1 in March from 33.7 in February.

• UK’s Royal Institution of Chartered Surveyors said the number of residential property agents and surveyors saying prices fell exceeded those reporting gains by 64.1 percentage points in February, the most since June 1990.

Asia-Pacific

• Japan’s main opposition party said it will reject Prime Minister Yasuo Fukuda’s candidate Toshiro Muto to lead the Bank of Japan, deepening a political standoff only a week before the current BOJ governor's term expires.


• Australian business rose to -2 in February from -4 in January, according to National Australia Bank Ltd. A negative number shows those expecting business to deteriorate outnumber those predicting an improvement.


• China’s inflation rose a stronger-than-expected 8.7% y/y in February, the fastest pace in 11 years, the Statistics Bureau said. Food prices soared 23% y/y after blizzards.

FX Strategy Update