Expert Analysis of Today's Market

• The dollar was flat against most major currencies on Tuesday. The USD/JPY traded near a 3-month high and the EUR/USD traded near a 5-week high on speculation the Federal Reserve will not need to lower interest rates anytime soon. The EUR/USD did not rally despite stronger-than-expected ZEW data. This may be indicative of further losses for the pair.


• Having moved higher in a well-defined trading channel, the USD/JPY is testing resistance from the upper trading band. The relative strength index indicates the pair’s overbought condition. The pair will possibly test the resistance of the early-2007 highs at the 122-area. The USD/JPY is supported by carry trades and the biggest risk to further gains would be a drop in global equity prices.

• The Ifo world economic climate indicator points to a robust world economic growth in the second half of 2007. In Western Europe, the Ifo climate indicator rose again, reaching a 6-year high. In North America, the climate indicator dropped and is now for the first time in four years below its long-term average. In Asia, the climate indicator fell but is still clearly above its long-term average.

Financial and Economic News and Comments

US & Canada

• US Treasury Secretary Henry Paulson opened high-level meetings with Chinese officials, saying the US and China need to confirm their economic dialogue will be followed up with action. “We both face challenges of domestic protectionism and questions about the merits of trade and globalization….There is a growing skepticism in each country about the others’ intentions,” Paulson said in his opening statement on the first day of high-level meetings with Chinese officials.


• Manufacturing activity in the central Atlantic region continued to show weakness in May, according to the Richmond Fed’s latest survey. The seasonally adjusted manufacturing index edged up to -10 in May from April’s reading of -11. Among the index’s components, shipments gained eight points to -7, new orders slipped two points to -13, and the jobs index fell three points to finish at -9. Other indicators were mostly flat.

Europe

• The ZEW index of German investor sentiment in May exceeded expectations, rising 7.5 points from 16.5 in April to 24.0 in May. The assessment of the current business situation rose from 76.9 points to 88.0 points, a new all-time high. Economic expectations for the eurozone increased as well. The investor sentiment indicator rose by 11.6 points to 22.3 points. The corresponding indicator for the current economic situation in the eurozone increased by 11.9 to 81.8 points.

Asia-Pacific

• The minutes of the Bank of Japan policy board’s April 9-10 meeting showed BOJ policy makers agreed to maintain the current monetary policy stance. “Members concurred that it would be appropriate to keep their basic thinking on the future course of monetary policy unchanged,” according to the minutes released today.


• Japanese supermarket sales fell 1.0% y/y in April after a 1.5% y/y drop in March, down for the 16th straight month as cool weather hit spring clothing sales, the Japan Chain Stores Association said.

FX Strategy Update