Expert Analysis of Today's Market

• The dollar traded mostly lower on Monday as lower-than-expected bank earnings increased concerns about financial-market stress. The yen and Swiss franc gained on increased risk aversion. The Canadian dollar was little changed before the Bank of Canada is forecast to cut its benchmark interest rate by 50 basis points at its rate decision meeting tomorrow. The Australian dollar rose following rising Australian Q1 2008 producer prices reducing the chance of any Reserve Bank of Australia rate cuts. Sterling fell against the dollar after the Bank of England unveiled a plan to relieve the crisis in the money market.


• The EUR/USD rose on ECB Governing Council members’ hawkish comments decreasing the chance of any ECB rate cuts soon. The futures market is pricing in less chance of aggressive Fed rate cuts, but that did not pressure the pair today as the ECB is seen more hawkish. There are support in the 1.57-area and resistance at the 1.60-handle.

Financial and Economic News and Comments

US & Canada

• No major US economic indicators scheduled for today.


• The Bank of Canada is expected to cut its key interest rate a half-percentage point tomorrow to the lowest level since December 2005.

Europe

• In a bid to ease the current credit crunch, the Bank of England announced a plan to allow banks to temporarily swap $100 billion of mortgage-backed and other securities for UK Treasury bills. BOE Governor Mervyn King said the plan aims to restore confidence to the banking system and “everyone needs to know this is there for them to access as needed.” He added “there is no arbitrary limit on this so it could well go higher.” Banks will have to pay a borrowing fee to participate in the plan and the value of the securities they receive will be less than that of the mortgage-backed bonds they hand over to the BOE. Designed to ease the counterparty risk issues that have plagued inter-bank lending, the plan is similar to policies the Federal Reserve and the European Central Bank have in place.


• ECB Governing Council member Erkki Liikanen said “inflation risks are real.” He acknowledged risks to eurozone growth, indicating that slower growth should eventually bring down inflation. However, he stressed: “Our prime mandate is price stability. And history shows that if you fail there, it’s a long negative impact on growth and it’s very hard to get back.”


• ECB Governing Council member Klaus Liebscher said record oil prices are starting to push up wages and inflation leaves no room for the ECB to cut interest rates even with risks to the economic outlook on the “downside.”


• ECB Governing Council member Axel Weber said the ECB will monitor “very closely” all developments in the coming weeks to decide whether the current interest rate levels will help the bank fulfill its price stability mandate. Weber said the Governing Council has always stressed its top priority is to firmly anchor the medium and long-term inflationary expectations. “Therefore we will continue to monitor very closely all developments in the next weeks and decide whether the current levels of interest rates guarantee the fulfillment of our mandate,” he said.


• The Swiss National Bank increased its holdings of yen and decreased its holdings of US dollar and sterling assets in the first quarter, while leaving the holdings of euro assets little changed, the SNB said.

Asia-Pacific

• The Australian producer price index rose a stronger-than-expected 1.9% q/q in Q1 2008, the most since the series began in 1998, after rising 0.6% q/q in Q4 2007, the Bureau of Statistics said. The Q1 PPI climbed 4.8% y/y. The strong inflation keeps pressures on the Reserve Bank of Australia not to cut interest rates at its next meeting on May 6.

FX Strategy Update