Expert Analysis of Today's Market

• In NY trading Thursday, the dollar showed little reaction to today’s benign US PPI report. The EUR/USD was little changed awaiting tomorrow’s US CPI report. The yen fell against most major currencies as higher equity prices gave renewed interests in carry-trades. The AUD/USD fell after Reserve Bank of Australia Governor Glenn Stevens’ dovish comments.


• The USD/JPY broke resistance at the 122-handle yesterday. The pair is testing resistance from the upper trading band from the upward sloping trading channel in which the pair has been confined since March. The pair is supported by huge interest rate differentials and demographic factors that induce Japanese investors to invest abroad. The pair is overbought and the Bank of Japan is expected to keep rates unchanged. A more hawkish BOJ stance may bring some profit-taking, but the longer-term risk is increased risk aversion from falling asset prices.

Financial and Economic News and Comments

US & Canada

• The US producer price index (PPI) rose a stronger-than-expected 0.9% m/m and 3.9% y/y in May boosted by sharply rising energy costs, the Labor Department reported. The core PPI rose 0.2% m/m and 1.6% y/y. Although core inflation for finished goods is relatively low, the concept of core inflation is questionable when the combination of food and energy prices tends to move in one direction. The PPI may not be as good leading indicator as tomorrow’s consumer price index (CPI) report as the PPI is a goods-only index referring to just domestic production while the CPI includes services where inflation tends to run higher.

• US initial jobless claims were unchanged from last week’s low 311K level and continuing claims dropped 43K, the Labor Department reported. The report indicates continued strength in the labor market.

Europe

• Eurozone inflation rose 1.9% y/y in May, the same pace as in April, Eurostat reported.


• Total hourly labor costs in the eurozone rose 2.2% y/y in Q1 2007, the same pace as in Q4 2006, Eurostat said.


• Germany inflation rate held steady at 2%. Harmonized CPI rose 0.2% m/m and 2.0% y/y in May, the Federal Statistics Office said.


• The Swiss National Bank increased its target rate by 25 basis points to 2.5%, the highest since September 2001. Although inflation has held at less than half the bank’s 2% limit this year, SNB President Jean-Pierre Roth toughened his tone on inflation as the decline in the franc increased the cost of imported goods. “Switzerland’s economy is in excellent shape….Should economic momentum remain unchanged or should movements in the Swiss franc result in a further relaxation of monetary conditions, further increases in the interest rate are likely in the months ahead,” Roth said at a press conference in Bern today.

Asia-Pacific

• China’s industrial production rose a stronger-than-expected 18.1% y/y in May after gaining 17.4% y/y in April, the National Bureau of Statistics said.


• The Australian dollar weakened after Reserve Bank of Australia Governor Glenn Stevens’ dovish comments. “The somewhat lower short-term inflation outlook means that the starting point for a future pickup in inflation is likely to be a bit lower than earlier thought….This has afforded some additional time in which to assess trends in demand and the economy’s capacity to meet them, while still leaving scope to implement a further response by monetary policy as and when needed,” Stevens said in Brisbane today.

FX Strategy Update