Expert Analysis of Today's Market

• The dollar fell against most major currencies on Wednesday. Sterling advanced after the minutes of the Bank of England’s latest Monetary Policy Committee meeting revealed all nine MPC members unexpectedly voted to raise UK interest rates by 25 basis points to 5.5%. The euro was supported by ECB council member Axel Weber’s hawkish comments. The markets are pricing higher interest rates in the EMU and the UK. The yen was pressured by continued capital outflows as Japanese investors look for higher yield abroad and new highs in the global stock markets boost carry-trades.


• Having moved lower in a well-defined trading channel, the GBP/USD bounced higher on solid support in the 1.97-area. The pair jumped on hawkish BOE minutes and is now just below the resistance of April’s downward sloping trading channel. If this resistance is broken, we may see a continuing jump and a possible test of the 2.0130 set on April 18.

Financial and Economic News and Comments

US & Canada

• US Treasury Secretary Henry Paulson, ending the two-day Strategic Economic Dialogue with China’s top economic leaders, said the negotiations produced “tangible results” that will help build confidence in bilateral trade relations. “While we have much more work to do, we have tangible results for our efforts thus far,” Paulson said in a statement today in Washington. Chinese Vice Premier Wu Yi said in her closing remarks that talks must continue, as the alternative to sanction.


• The leading indicator increased a slightly less-than-expected 0.4% m/m in April, indicating continued strong growth for the Canadian economy.

Europe

• Bank of England policy makers voted unanimously to raise the benchmark interest rate by 25 basis points to 5.5% in its May meeting, saying borrowing costs may need to increase again to contain inflation. “The committee agreed that, should the economy continue to develop broadly in line with the central expectation, bank rate could be raised further as necessary,” the nine-member Monetary Policy Committee said in the minutes of the May 9-10 meeting published today. The minutes surprised investors who expected at least one member to vote to keep interest rates on hold, while the MPC also revealed some members considered voting for a 50 basis-point increase.


• ECB council member Axel Weber said the European Central Bank is in a “stance of strong vigilance” on inflation. The inflation risks are tilting upward for 2008/2009 on rising capacity utilization and rising labor costs. M3 growth is strong and EMU economic growth is on self-sustaining upturn. When inflation risks rise, interest rates must rise too, Weber said.


• The euro-area industrial new orders index increased 2.7% m/m and 8.0% y/y in March, Eurostat reported.


• Germany’s economic growth grew 0.5% in Q1, adding to evidence that the German economy will reach the government’s 2.3% forecast for 2007, the Finance Ministry said in its monthly report.


• German real construction orders rose 4.2% m/m in March and 7.7% y/y, Eurostat reported.

Asia-Pacific

• Japanese asset management companies and banks from today to June 1 will market ¥1.4 trillion ($11.5 billion) of funds focused on foreign securities, according to Bloomberg. Japanese companies pay bonuses every June and December as part of their overall compensation packages.


• Japan’s all industry index fell 1.4% in March, raising concerns about the sustainability of the Japanese economic expansion.


• The Bank of Thailand cut its benchmark interest rate to 3.5% from 4.0%, the fourth cut this year to revive spending by consumers and businesses whose confidence is near a 5-year low.

FX Strategy Update