Expert Analysis of Today's Market

• The dollar fell against most key currencies in light pre-holiday trading Friday after a report showed US existinghome sales fell more than expected, dimming hopes for a quick recovery in the housing market. The yen reversed yesterday’s gains after stocks recovered and tension with North Korea increased. The US will be closed on Monday for Memorial Day.


• The EUR/JPY is struggling to penetrate the 164-handle resistance. If the resistance is broken, the pair will rally. Yesterday the pair fell on increased risk aversion as stocks fell. The pair recovered today after North Korea test-fired several short-range missiles and Japan responded with threats of sanctions. The EUR/JPY was also supported by rising Chinese stocks and large Japanese bonus payments in June that are expected to flow abroad in search of higher returns.

• After failing to break the 81-area support, the US dollar index has rallied nicely. However, the index has massive resistance in the 83-area, both from the December 2006 lows and more importantly from the longterm downward sloping trend-line. We expect the index to move higher, but it will be a tough task to break through this resistance.

Financial and Economic News and Comments

US & Canada

• US existing-home sales dropped more than expected in April to the lowest level in almost four years. Sales fell 2.6% to an annual rate of 5.99 million in April from 6.15 million in March, the National Association of Realtors said. Meanwhile the supply of homes for sale at the current sales pace rose to the highest since August 1992. Sales fell 10.7% y/y in April, about the same pace as March. The median price of an existing home fell 0.8% y/y in April to $220,900. It is still too early to call a bottom in the housing market.

Europe

• The German import prices increased 0.9% m/m in April on more expensive energy products, the Federal Statistical Office reported. Energy prices rose 3.9% m/m.


• UK Q1 GDP growth rose 0.8% q/q and 2.9% y/y. The report indicates strong inflationary pressures as the GDP deflator rising to 3.2% y/y, the highest since Q4 2003, according to the National Statistics.

Asia-Pacific

• Japan’s core consumer prices fell at a slower pace in April. Core prices, which exclude fresh food, declined 0.1% y/y, the Statistics Bureau said. The Tokyo area core prices for May were unchanged y/y. The numbers are benign, likely keeping the Bank of Japan on hold until the mid-summer.

• The yuan is not the cause of the US trade deficit and a large appreciation would hurt China’s economy, Vice Premier Wu Yi said, signaling China will not cave in to demands for faster gains. “China will continue to reform its exchange rate on its own initiative, gradually,” Wu said.

FX Strategy Update