Expert Analysis of Today's Market

• The dollar was lower against other key currencies on Monday ahead of Wednesday’s Fed meeting when the FOMC is expected to cut 25 basis points and signal it is close to ending cuts in the Fed funds rate. Futures on the Chicago Board of Trade showed an 80% chance the Fed will lower the target rate 25 basis points to 2.0% and a 20% chance of keeping rate unchanged at 2.25%. The risk to the dollar positive outlook is that the market is ahead of the Fed. The euro gained modestly on European Central Bank members’ hawkish comments. The dollar block currencies were supported by strength in energy and commodity markets.


• The USD/JPY gained in lockstep with the equity market since making a low in mid-March. Like the stock market, the pair is now at important resistance. The Fed is seen as more concerned about the inflationary impact of its 300 basis-point easing and likely to announce a pause in its monetary easing. This may increase risk appetite and carry trades, which would strengthen the pair. There are major resistance for the USD/JPY in the 105-106-area and support in the 100-99 area.

Financial and Economic News and Comments

US & Canada

• The Dallas Fed production index moved slightly lower to 12.5 in April from 13.6 in March, while the general business activity index stood at -23.4 in April from -22.7 in March, the Federal Reserve Bank of Dallas said. The index for volume of new orders slipped to 8.1 in April from March’s 11.8. The overall figures indicate Texas manufacturing activity remained sluggish in April.

• The Chicago Fed Midwest manufacturing index declined 0.7% in March, to a seasonally adjusted level of 107.6, after decreasing a revised 0.8% in February to 108.4, the Federal Reserve Bank of Chicago said. The Federal Reserve Board’s industrial production index for manufacturing was unchanged in March. Regional output in March was 0.6% higher than a year earlier, below the 1.4% rise in national output.

Europe

• GfK’s German consumer climate indicator unexpectedly improved to 5.9 in May from 4.6 in April. Most other measures of consumer sentiment also improved.

• European Central Bank President Jean-Claude Trichet said the ECB must set interest rates with the sole goal of maintaining price stability. The ECB’s mandate is to “preserve price stability in the medium and long term.” Trichet reiterated that he is concerned about a surge in the euro against the dollar, according to an interview with the Austrian state broadcaster, ORF.


• “The [inflation] level is too high,” ECB Governing Council member Klaus Liebscher said, adding that the council must “do everything which is necessary to prevent any materialization of second-round effects and higher inflation rates.”


• The European EMU area GDP will slow to a 1.7% y/y rate in 2008 and slow further to 1.5% y/y in 2009. EMU economic growth was 2.6% y/y in 2007, the European Commission said. Inflation in the euro zone is forecast to rise 3.2% y/y in 2008, moderating to 2.2% y/y in 2009, still above the ECB’s 2.0% upper target.


• UK house prices fell 0.6% m/m and 0.9% y/y in April, which is the seventh consecutive monthly fall, Hometrack said.


• Swiss National Bank Governing Board member Thomas Jordan said the current level of interest rates in Switzerland is “appropriate” and that the SNB is closely monitoring risks to inflation and economic growth.

Asia-Pacific

• Japan’s retail sales rose 1.1% y/y and 1.4% m/m in March, slightly more than expected as households paid more for gasoline and food, the Trade Ministry said. The report, only accounting for spending in shops, excludes Internet retailing and restaurant spending. Japanese online shopping rose 9.5% y/y in March to ¥3.7 trillion ($35 billion), according to the Japan Direct Marketing Association.

FX Strategy Update