Expert Analysis of Today's Market

• The dollar rose against key currencies on Wednesday after a stronger-than-expected increase in the April US industrial production. The euro hit fresh highs versus the yen and Swiss franc on expectations the EMU will keep raising interest rates and the Bank of Japan is unlikely to raise rates anytime soon; thus, leading to more capital outflows from Japan. The Australian dollar fell against all major currencies after a report shown Australian wages rose less than forecast in Q1, weakening the case for the Reserve Bank of Australia to raise interest rates this year.


• The EUR/JPY rose to a record high boosted by huge Japanese interest-rate disadvantage. Continued advance in equity markets spurred investors to buy higher-yielding assets funded by the yen (and Swiss franc). The break of the resistance suggests the pair will move higher, at least, as long as the global stock markets hold up.

Financial and Economic News and Comments

US & Canada

• US housing starts unexpectedly rose to an annual rate of 1.528 million in April, a 2.5% increase from March’s downwardly revised 1.491 million pace, the US Commerce Department said. Building permits dropped 8.9% to a 1.429 million rate, the lowest since June 1997. Starts fell 16.1% y/y, compared to permits dropping 28.1% y/y. Today’s mixed housing numbers suggest housing will remain a drag on GDP growth for the next few quarters.


• US industrial production rose a stronger-than-expected 0.7% m/m in April after March’s upwardly revised 0.3% m/m rise, the Federal Reserve reported. Capacity utilization rose to 81.6% from 81.2% in March.

Europe

• The eurozone annual harmonized consumer price index was revised up to 1.9% m/m in April from the flash estimate of 1.8%, Eurostat reported. April marked the eighth straight month in which eurozone headline inflation was below 2%.


• Economic sentiment in the euro area improved markedly in Q2. Ifo’s economic climate index for the eurozone rose to 106.8 with the forward-looking index component indicating a robust economic upswing in the second half of 2007.


• UK earnings growth eased in March as financial sector bonus payments fell back from their February highs. Headline average earnings growth, the 3-month average, fell to 4.5% in March from 4.6% in February, National Statistics reported.


• German final harmonized consumer price inflation for April was at 2% y/y and 0.4% m/m, the Federal Statistical Office reported.

Asia-Pacific

• Japan’s industrial production fell 0.3% m/m in March, revised up from the initial estimate of a 0.6% fall, the Ministry of Economy, Trade and Industry said.


• Japan’s consumer confidence rose to 47.4 in April from 46.8 in March, the Cabinet Office said.


• China’s Premier Wen Jiabao pledged to loosen controls on the exchange rate and take steps to curb a record trade surplus, a week before a summit in the US to discuss ways to reduce imbalances. “China will gradually increase the flexibility of its currency regime….We will take a number of measures to strengthen our control of the economy and to boost domestic consumption,” Wen said.


• The Australian wage price index rose a less-than-expected 1.0% q/q in Q1 2007, after rising 1.1% q/q in Q4 2006, the Bureau of Statistics said.

FX Strategy Update