Expert Analysis of Today's Market

• The dollar rose against key currencies on Thursday. The yen fell after the Cabinet Office said Japan’s Q1 GDP rose slightly less than expected. The USD/JPY traded close to a 3-month high and the EUR/JPY eased slightly from the 163.90 all-time high. The Canadian dollar advanced versus major currencies after a government report showed Canada’s core inflation in April accelerated to its highest in more than four years.


• 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 initial jobless claims fell by 5,000 to 293,000 in the week ended May 12, the US Labor Department said. The 4-week moving average declined to 305,500, the lowest in a year, from 317,500. The numbers indicate underlying strength in the US labor market.


• The Conference Board’s index of leading economic indicators unexpectedly fell 0.5% in April after March’s upwardly revised 0.6% increase. The April LEI decline indicates the US economy is having difficulty overcoming weakness in the housing market.


• Manufacturing in the Philadelphia region accelerated more than forecast in May as orders and shipments rose. The Federal Reserve Bank of Philadelphia’s general economic index rose to 4.2 in May from 0.2 in April, the bank said. This indicates the US manufacturing sector is recovering from its slump.


• Federal Reserve Chairman Ben S. Bernanke said a tightening in sub-prime mortgage standards will hurt the US housing market and foreclosures will rise through 2008. He also said private-equity financing carries “significant risks” for banks and the Fed is reviewing the issue.


• Canadian core inflation rate rose a stronger-than-expected 2.5% y/y in April, the fastest pace since 2003, from March’s 2.3%, Statistics Canada said.

Europe

• “Strong vigilance is of the essence in order to ensure that risks to price stability over the medium term do not materialize,” the European Central Bank said in its monthly bulletin published today. “The outlook for price developments remains subject to upside risks” and “acting in a firm and timely manner” is warranted, the ECB said.


• Residential property prices in the eurozone rose 6.4% in 2006, down from 7.9% growth in 2005 and the slowest rate of increase since 2001, the ECB said in its monthly bulletin published today. House-price inflation slowed to 6.0% in the second half of 2006 from 6.9% in the first half.

Asia-Pacific

• Japan’s economy grew slightly less than expected in Q1 2007 as investment slowed. The Q1 GDP grew 0.6% q/q and 2.4% y/y, the Cabinet Office said. The Q4 2006 figure was revised to 5.0% y/y from 5.5%. Consumer spending rose slightly more than expected and capital investment unexpectedly declined 0.9%. Exports rose a more-than-expected 3.3%. The GDP deflator fell 0.2% y/y, compared with expectations of a 0.4% drop. The deflator has not risen since 1998.

• The Bank of Japan kept its benchmark interest rate unchanged at 0.5%. The BOJ can raise interest rates despite falling consumer prices, as long as it is confident about the outlook for the Japanese economy, BOJ Governor Toshihiko Fukui said. “A rate increase is still possible even if prices are slightly negative as long as we have thoroughly evaluated all aspects” of the economy and prices, Fukui said at the press conference.

FX Strategy Update