Expert Analysis of Today's Market

• The dollar was mostly lower on Wednesday following weak US economic data and continuing credit-market concerns. The yen rose against most key currencies on concerns that credit-market losses will widen and reduce investors’ interest in carry trades. The increased risk aversion pressured the Australian dollar but supported the Swiss franc. The Canadian dollar was pressured by the spillover effects of the slowing US economy while sterling was undermined by Bank of England Governor Mervyn King’s bearish comments that current market conditions made the BOE Monetary Policy Committee more predisposed to an interest-rate cut and the pound’s decline is an “unwinding of the appreciation” in 2006.


• The EUR/USD rallied for the second day on widening growth and interest rate advantage. US economic data were below expectations while European data surprised to the upside. European Central Bank President Jean-Claude Trichet’s hawkish testimony to the European Parliament reduced the bets that ECB interest rates will be lowered anytime soon while more signs of a deepening US slump have increased bets on lower US rates. The pair looks set for an imminent test of the all-time high 1.5902 (reached on March 17). There is support in the 1.55-area.

Financial and Economic News and Comments

US & Canada

• US durable goods orders unexpectedly fell 1.7% m/m in February to a seasonally adjusted $210.65 billion, the Commerce Department said. Excluding transportation, orders fell 2.6% m/m in February. Nondefense capital goods excluding aircraft fell 2.6% m/m. Although the durable goods orders rose 4.3% y/y, the overall data show US economic weakness and another indication of a recession.

• US new-home sales fell 1.8% m/m in February to a seasonally adjusted annual rate of 590,000 units, the slowest sales pace since February 1995, the Commerce Department said. New-home sales fell 29.8% y/y. The median price of a home was $244,100 in February, down 2.7% y/y.

Europe

• Ifo’s German business confidence gauge unexpectedly rose for a third month in March. The business climate index increased to 104.8 in March from 104.1 in February. The business expectations index rose to 98.4 in March from 98.2 in February, while the business conditions index advanced to 111.5 from 110.3.

• European Central Bank President Jean-Claude Trichet said “uncertainty about the prospects for economic growth remains unusually high” but stressed the ECB remains “inflexibly attached” to its price-stability mandate as long as inflation is a problem. He implied there were no plans to cut interest rates. “The current monetary-policy stance will contribute to achieving our price-stability objective,” Trichet said, adding that the risk to the medium-term outlook for inflation is on the upside.


• EMU new industrial orders rose 7.7% y/y in January, Eurostat reported.


• Bank of England Governor Mervyn King indicated that the BOE was planning to buy or swap illiquid assets (mortgages) on banks’ books for cash or liquid assets as way to find a “longer-term resolution” to the problems faced by UK banks. King made it clear that he wanted to separate the financial crisis from monetary policy and said that the two interest-rate cuts so far had offset tighter conditions in mortgage markets, so monetary conditions were broadly unchanged. Asked whether current market conditions made the Monetary Policy Committee more predisposed to a rate cut, he replied: “Yes.”

Asia-Pacific

• Japan’s exports increased a stronger-than-expected 8.7% y/y while imports rose 10.1% and the trade surplus widened 0.9% to ¥969.9 billion ($9.7 billion) in February, the Finance Ministry said. Export growth to Asia quickened to 13.9% y/y in February from 8.1% y/y in January. Shipments to China rose 14.9% y/y and exports to Europe gained 7.2% y/y. Exports to the US fell 6.0% y/y.

FX Strategy Update