Expert Analysis of Today's Market

• The dollar declined versus its rivals Wednesday as US stocks fell on worries about the impact of slow economic growth and rising inflation on earnings. Credit spreads worsened and Fannie Mae paid a record yield over two-year notes amid concerns US mortgage-finance companies do not have enough capital. The USD/JPY fell on carry-trade unwinding as US equity prices plunged. Sterling rose ahead of the Bank of England’s interest-rate decision tomorrow. The BOE is expected to keep its key rate unchanged at 5.0%. The Australian dollar rose after testing support at 0.95 despite the weakest Australian consumer sentiment since 1992. The Canadian dollar gained as gold prices rose and Canadian housing starts exceeded expectations.


• The EUR/USD rose following oil prices’ breaking a two-session losing streak and hawkish European Central Bank comments. ECB President Jean-Claude Trichet said inflation is “worrying,” boosting expectations of further ECB rate hikes. ECB Executive Council member Jose Manuel Gonzalez Paramo said the ECB will do “whatever is necessary at all times to anchor inflation expectations and mid-term price stability.” There are important resistance at the 1.60-handle and significant support at the 1.54-handle. A break of the support will reverse the long EUR/USD uptrend, while a penetration of the resistance will indicate the beginning of a new high.

Financial and Economic News and Comments

US & Canada

• Canada’s housing starts totaled 217,800 on an annualized basis in June, exceeding expectations, following a revised 227,700 in May, data from Canada Mortgage and Housing Corp. showed.

Europe

• The euro-area gross domestic product grew 0.7% q/q in Q1 2008, less than the 0.8% q/q previously reported, showing signs of cooling expansion in Europe’s largest economies, data from Eurostat showed. The GDP rose 2.1% y/y. Import growth was revised to 2.0% q/q from 1.8% q/q.

• Germany’s trade surplus narrowed to €14.4 billion ($22.54 billion) in May from a revised €18.8 billion in April, while its current-account surplus shrank to €7.5 billion from a revised €15.5 billion, the Federal Statistics Office said. Germany’s exports dropped to €80.8 billion in May, according to unadjusted data, from €89.7 billion in April. Calendar-year and seasonally adjusted data showed exports narrowing 3.2% to €82.6 billion in May from €85.3 billion in April. Imports fell to €66.5 billion from €70.9 billion in unadjusted terms. Calendaryear and seasonally adjusted data showed imports increasing 0.7% to €68 billion in May from €67.5 billion in April. The overall figures show a sharp fall in Germany’s exports in May pushing its trade surplus to a significantly lower level than expected, signaling the resilience of the German economy is fading.

• The Nationwide UK sentiment index fell to 63 in June from 69 in May, indicating UK consumer confidence declined to the lowest level since the survey began in May 2004, Nationwide Building Society said. The expectations index fell to 66 in June from 75 in May. The present situation index fell to 59, while the spending index rose to 63 in June.

• UK mortgage rates surged to 6.63% in June, the highest since February 2000, from May’s 6.26%, the Bank of England said.

Asia-Pacific

• The Australian consumer sentiment index fell from 84.7 in June to 79.0 in July on rising gas prices, indicating the lowest Australin consumer confidence since January 1992 and a 34.6% y/y decline, the Westpac- Melbourne Institute said. The expectations index fell to 81.0 in July from 88.8 in June.

• Japan’s core private-sector machinery orders rose a stronger-than-expepected 10.4% m/m in May to ¥1.11 trillion ($10.3 billion), the Cabinet Office said. Machinery orders rose 5.1% y/y in May. Total orders rose 10.8% m/m to ¥2.84 trillion, up 3.6% y/y. The Cabinet Office said the latest data suggested orders “are not likely to fall dramatically.” These orders figures are volatile and the Japanese economy is slowing.

FX Strategy Update