Expert Analysis of Today's Market

• The dollar was mostly lower against its key rivals Friday after stock plunged on GE's unexpected earnings decline increasing concerns the credit squeeze is spreading. The dollar fell against the euro on speculation the G-7 policy makers meeting today are unlikely to agree on a plan to support the US currency. The yen and Swiss franc rose against all the major currencies on increased risk aversion. The EUR/GBP rose to a new record on bets the Bank of England will keep cutting interest rates as the UK economy slows. The dollar block currencies were hard hit as investors reduced carry-trades.


• The USD/JPY fell following renewed pessimism the worst may not be over in the credit market. The pair has corrected its oversold condition after the mid-March low and may now be at the beginning of a new down-leg. The pair is strongly correlated with the stock market. Unable to penetrate its downtrend, the stock market is likely to test the lows from earlier this year. There is major USD/JPY support at 99.00 and major resistance at 103.00.

Financial and Economic News and Comments

US & Canada

• The Reuters/University of Michigan index of US consumer sentiment fell more than expected to 63.2 in April from 69.5 in March. The expectations index dropped to 53.4 in April, the lowest reading since November 1990, from 60.1 in March. The current conditions index fell to 78.4 in April, the lowest since January 1983, from 84.1 in March. April US consumer sentiment decline is consistent with our view that the US economy is in a recession. Consumer inflationary expectations rose to 4.8% in a year, compared with 4.3% projected last month.

• The Federal Reserve cut interest rates from 6.5% to 1.75% in 2001. Fed minutes released today showed that the Fed began to worry about deflation when cutting rates by 50 basis points at the November 2002 meeting to 1.25%. “We are dealing with what basically is a latent deflationary type of economy, and we are all acutely aware of the implications of that economy,” the Fed Chairman at the time, Alan Greenspan, said. “It is a pretty scary prospect, and one that we certainly want to avoid,” he said. We believe the negative real fed funds rate following the Fed aggressive rate cuts was the seed to the current US economic turmoil as it over-stimulated the economy. The only time before the real fed funds rate had been negative for an extended time was in the 70s.
  
  
• The negative real fed funds rate in the 70s led to inflation and surging oil prices. The negative real fed funds rate in the 2000s led to a housing bubble and surging commodity markets. The recent Fed aggressive rate cuts have made the real fed funds rate negative once more. The green line is the real fed funds rate and the red is US inflation.

• US import prices rose a stronger-than-expected 2.8% m/m and 14.8% y/y in March, the Labor Department said. Export prices increased 1.5% m/m and 7.9% y/y in March. Excluding petroleum, all other import prices rose 1.1% m/m and 5.4% y/y in March. The 1.1% March increase in non-petroleum prices marked the largest one-month increase since the index was first published monthly in December 1988.

Europe

• European Central Bank council member Axel Weber believes the ECB benchmark interest rate is at the appropriate level. “I’ve said before that I don’t see any room to cut rates given the current environment,” Weber said. At the same time, he said there’s no immediate need for the ECB to raise borrowing costs. He also said the European economic outlook is “robust” and the IMF’s forecast for Europe is too “pessimistic” and did not share the IMF’s view that European inflation will fall to 1.9% in 2009. “I don't share the IMF’s estimate that inflation will be as modest, and that’s why I don't see room to cut interest rates,'' Weber said.


• Luxembourg Finance Minister Jean-Claude Juncker said “excessive volatility of exchange rates is not welcome because it is having” an effect on economic growth.


• The German wholesale price index rose a stronger-than-expected 1.6% m/m and 7.1%y/y in March, the Federal Statistics Office said.

Asia-Pacific

• China’s foreign exchange reserves surged to $1.68 trillion at the end of March. Currency holdings expanded 40% y/y, the People’s Bank of China said. China’s M2 money supply rose 16.3% y/y in March, the slowest pace in more than a year, following a 17.5% y/y rise in February, the PBC said.


• The IMF said it expects growth in Asia and the Pacific to decline by 1.25 percentage points to 6.2% in 2008 because of the weakening economic growth in the United States and Europe. “While growth remains high, led by China and India, and domestic demand is still robust, key activity indicators in recent months suggest that momentum is easing. Confidence indicators also point to a slowing pace of activity,” the IMF said.


• Japan's core private sector machinery orders fell a smaller-than-expected 12.7% m/m to ¥1.06 trillion ($10.4 billion) in February from a 19.6% m/m rise in January, the Cabinet Offices said.

FX Strategy Update