Expert Analysis of Today's Market

• The dollar fell modestly against most key currencies on Tuesday after US consumer prices in April rose less than expected. The USD/CAD fell to an 11-month low on the strong Canadian March manufacturing. The EUR/JPY is testing important resistance at 163.50.


• The EUR/USD, having formed a top, has traded lower the last couple of weeks. The 2-month uptrend has been tentatively broken. The pair is testing resistance from recently established minor downtrend at the 1.36 handle. There are minor support at the 1.35-handle and strong support in the 1.33-area. If the resistance at 1.36 is broken, the pair will move higher and test the important double-top at the 1.37-area. If the resistance at 1.36 holds, the pair will possibly test support at the 1.33-area.

Financial and Economic News and Comments

US & Canada

• The US April CPI rose a less-than-expected 0.4% m/m and 2.6% y/y as the core CPI increased the expected 0.2% m/m to leave a 2.3% y/y pace. As shown in the chart, core inflation is decelerating but still high, close to the Fed’s discomfort zone. We do not expect any change in the Fed’s policy stance.

• The Empire State manufacturing index for May rose to 8.0 from 3.8. The 6-month outlook index rose to 49 from about 34. The outlook index was in the low to mid 30s, still a weak reading. Overall, the outlook is not solid but improving.


• Canada’s manufacturing shipments rose 2.8% in March, the fastest since January 2005, to C$50.1 billion ($45.5 billion), Statistics Canada said. February shipments rose 0.4%, above the initially reported 0.2% drop.

Europe

• Europe’s economy expanded more than forecast in Q1 as corporate investment offset the effects of higher euro-area interest rates and a German sales-tax increase. The eurozone economy expanded a more-than expected 0.6% q/q in Q1 2007 and rose 0.9% q/q in Q4 2006, the European Union’s statistics office said. The European economy is forecast to expand 0.7% in Q2 and Q3, respectively, the European Commission said.


• The German economy expanded more than expected in Q1, posting 0.5% growth compared with the 0.3% forecast of economists.


• UK consumer price inflation in April increased 0.3% m/m and 2.8% y/y, above the Bank of England’s 2% target for a 12th month. In March consumer prices rose 3.1% y/y, the most since 1997, the Office for National Statistics said.


• The Icon index of German consumer confidence gained three points in April, rising for the sixth straight month to hit an all-time high of +107, the Nuremberg-based economics research institute reported.

Asia-Pacific

• Japan’s machinery orders fell unexpectedly in March, indicating lower corporate investment in Japan. Orders dropped 4.50% m/m in March after declining a revised 4.9% in February, the Cabinet Office said.


• China’s retail sales grew 15.5% y/y in April. Sales climbed to 667.3 billion yuan ($86.8 billion) after rising 15.3% y/y in March, the National Bureau of Statistics said.

FX Strategy Update