Expert Analysis of Today's Market

• The dollar traded mixed following Tuesday’s US stock rally and 75 basis-point Fed rate cut. Two dissenting FOMC members and the 75-rather-than-100-basis-point cut may indicate that the Fed is getting closer to the end of its policy-easing cycle. The yen and Swiss franc fell on renewed carry-trade interest as stocks rallied on the Fed rate cut and better-than-expected earnings from Goldman Sachs and Lehman Brothers. Sterling was higher following higher-than-expected UK inflation while the Canadian dollar rose on rising Canadian core inflation. The Australian dollar was supported by renewed risk appetite.


• Unable to reach a new all-time high today, the EUR/USD fell moderately following today’s Fed rate cut. The pair is still in a clear uptrend but extremely overbought. If the 1.55-area support is broken, the pair will likely test the 1.50-area support.

Financial and Economic News and Comments

US & Canada

• The Federal Open Market Committee voted 8-2 to cut its target for the federal funds rate to 2.25% from 3%. “Recent information indicates that the outlook for economic activity has weakened further. Financial markets remain under considerable stress, and the tightening of the credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters,” the Fed said in a statement accompanying the decision. “Today's policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability,” the Fed said.


• US producer price index for finished goods rose 0.3% m/m and 6.4% y/y in February after increasing 1.0% m/m in January, the Labor Department said. The core PPI index, which excludes food and energy items, rose 0.5% m/m and 2.4% y/y, its highest monthly increase since November 2006.


• US housing starts fell 0.6% m/m and 28.4% y/y to 1.065 million homes at an annual rate in February, from an upwardly revised 1.071 million pace in January, the Commerce Department said. Building permits fell alarger- than-expected 7.8% m/m to a 978,000 annual pace, the lowest level in more than 16 years, indicating further contraction in the housing sector. The current level is approaching levels where the housing had bottomed in the previous recessions (yellow shading); however, we think it is still too early for a rebound in the housing market.

• The NAHB index for sales of new, single-family homes held steady at 20 in March, the National Association of Home Builders reported. The gauge is based on a survey of builders who were asked about prospects for sales.


• Canada’s consumer prices rose 0.4% m/m and 1.8% y/y in February. Core inflation unexpectedly rose 0.5% m/m and 1.5% y/y in February.

Europe

• UK consumer price inflation rose 0.7% m/m and 2.5% y/y in February, the Office for National Statistics said. Excluding food, energy, alcohol and tobacco, inflation slowed to 1.2% y/y in February, the weakest pace since August 2006. Retail price inflation was 4.1% y/y in February, the same as January. Retail prices rose 0.8% m/m, the most since December 2006.

Asia-Pacific

• The People’s Bank of China increased reserve requirement for banks by 0.5% to a record 15.5% of deposit after inflation accelerated to an 11-year high. The increase will take effect on March 25.


• The Japanese government nominated Koji Tanami, former vice finance minister, to replace Bank of Japan Governor Toshihiko Fukui, his term expires tomorrow. The opposition Democratic Party of Japan, which controls the upper house of Parliament, said it will reject Tanami to lead the BOJ, assuring a vacancy before the current governor’s term expires tomorrow.

FX Strategy Update