Expert Analysis of Today's Market

• The dollar traded mixed on Wednesday. The euro fell in a typical buy-the-rumor-sell-the-fact fashion after the European Central Bank as expected raised its key interest rate to 4.0% and ECB President Jean-Claude Trichet said the decision to raise interest rates today would restrain inflation expectations. The yen rose for the second day as Middle Eastern accounts were said to be buying the yen and some US investment firms recommended a reduction in carry trades. The Australian dollar rose on strong growth data and the Canadian dollar was also strong.


• The EUR/JPY fell for a second day pressured by increased risk aversion as US equity markets traded lower. It is too early to say if this is a normal correction or the beginning of something more serious. There is a clear divergence between the EUR/JPY price and relative strength index. The pair made an all-time high earlier this week, but the RSI was below the high set in May. This is a bearish indication for the EUR/JPY and carry trades.

Financial and Economic News and Comments

US & Canada

• US productivity rose 1.0% q/q in Q1 2007, the Labor Department said, down from an initially estimated 1.7% increase. The slower productivity raises inflation concerns, as the unit labor costs rose 1.8% in Q1, up from the 0.6% rise in the original estimate. The lower productivity and higher labor costs will keep the Federal Reserve from cutting interest rates.

Europe

• The European Central Bank raised its benchmark interest rate by a quarter-point to 4.0%, the highest since August 2001 and left the door open for another increase later this year.


• ECB President Jean-Claude Trichet in a hawkish press conference said inflation risks remain. “After today’s increase, given the positive economic environment in the euro area, our monetary policy is still on the accommodative side….Acting in a firm and timely manner to ensure price stability in the medium term is warranted,” Trichet said at a press conference.


• The ECB also raised their growth and inflation forecasts for 2007. The ECB staff sees 2007 growth between 2.3-2.9%; the earlier estimate was 2.1-2.9%. 2008 GDP is forecast between 1.8-2.9%. 2007 inflation is expected to be between 1.8% and 2.2%, compared to earlier estimate of between 1.5% and 2.1%. 2008 range was unchanged at 1.4-2.0%.


• German factory orders declined for the first time in three months in April. Orders fell 1.2% m/m in April, still a strong 11.7% rise y/y.


• UK consumer confidence rose 9 points to 99 in May, the highest level in 18 months, Nationwide Building Society reported. The indicator rose for the fourth straight month.


• UK permanent salaries inflation rose to a near 7-year high in May, according to the latest job report by KPMG, NTC Research and the Recruitment and Employment Confederation. The permanent salaries index rose to 64.8 in May from 63.6 in April, hitting an 83-month high. Temporary and contract pay rates rose to 60.1 from 59.1.

Asia-Pacific

• The Reserve Bank of Australia kept its benchmark interest rate unchanged at 6.25%, a 6-year high after three increases last year.


• Australia’s Q1 GDP rose a stronger-than-expected 1.6% q/q, the strongest pace in 3 years, the Bureau of Statistics said.


• Japan’s index of leading economic indicators fell to a preliminary 20.0 in April from a revised 33.3 in March, staying below the key 50.0 level for the sixth consecutive month, data from the Cabinet Office showed. The coincident index, which measures the present state of the economy, rose to 66.7 in April.

FX Strategy Update