Expert Analysis of Today's Market

• The dollar was sharply lower versus most key currencies in NY trading Wednesday, following more indications of a contracting US economy as housing starts fell to a 17-year low and the Fed Beige Book said the US economy continues to slow with tourism and exports the only bright spots. The dollar was little changed against the yen as a stock rally sparked carry-trade demand limiting the yen’s advance. The dollar block currencies were supported by increased interest in carry-trades as commodity prices rose.


• The EUR/USD broke resistance in the 1.59-area and rose to a new all-time high after a report showed March EMU inflation was accelerating, reducing the prospect the European Central Bank will cut interest rates anytime soon. Weak US economic figures increase the EMU’s yield and growth advantage. Technically, the pair is overbought; however, possibly continuing higher through psycological resistance at 1.6000.

Financial and Economic News and Comments

US & Canada

• The US consumer price index (CPI) rose 0.3% m/m in March, and core CPI, which excludes food and energy, rose 0.2% m/m, matching consensus forecasts, data from Labor Department showed. March CPI rose 4.0% y/y, the same rate as in February. Core CPI grew 2.4% y/y, above the Fed’s comfort zone of 1.5%-2%. The core price index for personal consumption expenditures, the Fed’s preferred measure, has also been rising, reaching 3.4% y/y through February. US rising inflation with a US recession complicates the Fed’s monetary policy whether the Fed should ease or tighten interest rates.

• US housing starts fell a more-than-expected 11.9% m/m in March to a seasonally adjusted 947,000 annual rate, after a revised 0.7% m/m decline in February to 1.075 million, the Commerce Department said. March housing starts fell 36.5% y/y. Building permits fell 5.8% m/m to a 927,000 annual rate in March, below consensus expectations, after dropping 7.3% to 984,000 in February. Permits fell 40.9% y/y. With the housing starts plummeting to an 17-year low, March housing figures indicate the US housing market will continue slumping.

• US industrial production unexpectedly gained 0.3% m/m in March, on increases in the output of electric and natural gas utilities, following a revised 0.7% m/m fall in February, the Federal Reserve said. Capacity utilization rose to 80.5% m/m in March after February’s downwardly revised 80.3% m/m. March industrial production increased 1.6% y/y, while capacity utilization rose 1.9% y/y.


• According to the Fed Beige Book, US economic growth has slowed in nine of its 12 districts since February, hurt by “anemic” real estate markets and a slowdown in consumer spending. “Economic conditions have weakened since the last report” and consumer spending “weakened in most” districts, the Fed’s report showed. The Fed said “housing markets and home construction remained sluggish throughout most of the nation” and residential construction is “generally anemic.” “Growth in consumption and business-investment spending has slowed markedly after years of robust performance, and, as a result, the economy has all but stalled and could even contract over the first half of the year,” San Francisco Fed Bank President Janet Yellen said in a speech in Alameda, California.

Europe

• The euro-zone CPI increased 1% m/m and accelerated to a 16-year high of unprecedented 3.6% y/y in March, from 3.3% y/y in February, Eurostat reported. The 3.6% y/y inflation number is far beyond the European Central Bank’s 2% target ceiling, reducing the chance of a near-term ECB interest-rate cut.

• In Germany, the inflation rate rose to 3.3% y/y in March, higher than initially estimated, from 2.9% y/y in February.


• UK jobless claims declined a less-than-expected 1,200 in March, after rising a revised 600 in February, the first increase in 17 months, the Office for National Statistics said. The figures showed signs of weakening in the UK job market.

Asia-Pacific

• China’s Q1 2008 GDP grew 10.6%, faster than estimated, and CPI rose 8.3% in March, near an 11-year high, the Statistics Bureau said in Beijing, prompting the People’s Bank of China to raise banks’ reserve requirements for the third time this year to cool the Chinese fast-growing economy. Reserve requirements will increase 50 basis points to 16% from April 25, up 50 basis points from the current 15.5%, the PBC announced.


• Japan’s machine tool orders rose 3.3% y/y in March after declining 0.5% y/y in February, revised data showed.

FX Strategy Update