Expert Analysis of Today's Market

• The dollar showed little reaction to Wednesday’s mixed US economic data as the market turned its focus to Thursday’s Federal Reserve interest-rate decision. The yen gained against the dollar and in the cross-trades after Japan’s Finance Minister Koji Omi said investors are taking risks in one-way bets against the yen and that the Japanese government is watching the yen’s development very carefully. Sterling is testing important resistance at 2.00 against the dollar.


• The USD/JPY has been testing resistance from the upper trading band from the 4-month bull-channel. The pair is supported by huge interest-rate differentials and risk appetites. However, the pair is overbought, and stock market volatility and verbal warnings of one-way bets are pressuring the pair. We expect the uptrend to resume after further profit-taking. This will relieve the oversold indication on the relative strength index as the pair should find support from the lower trading band in the 122-area.

Financial and Economic News and Comments

US & Canada

• US new-home sales fell 1.6% m/m and 16.0% y/y in May, to an annual pace of 915K from a downwardly revised 930K rate in April, the Commerce Department said. The supply of unsold homes at the current sales pace rose to 7.1 months in May from 7.0 months in April. The median price of a new home fell 0.9% y/y to $236,100 in May, down from $238,200 in May 2006. The average price rose 6.5% y/y to $313,000 from $293,900 a year earlier. Sales fell 11% in the Northeast, 7.3% in the South and 1.9% in the West but rose 31% in the Midwest.

• The S&P/Case-Shiller index for home values in 20 US metropolitan areas fell 2.1% y/y and the 10-city composite index declined 2.7% y/y in April, S&P/Case-Shiller reported. It was another indication that there is no short-term turnaround in the housing market. Elevated inventories of unsold homes, reduced demand and stricter loan requirements will keep the housing sector subdued into 2008 although the negative effect on GDP will be less severe compared to what happened last year.


• The Conference Board consumer confidence index fell more than expected to 103.9 in June from 108.5 in May, the Conference Board said. The present situation index declined to 127.9 from 136.1. The expectations index decreased to 87.9 from 90.1.


• The Richmond Fed manufacturing Index increased to 4 in June from -10 in May, the best reading since November 2006, the Federal Reserve Bank of Richmond said. A positive number indicates an expanding manufacturing sector.

Europe

• German export prices rose 0.3% m/m and 1.8% y/y in May and import prices rose 0.3% m/m and 0.6% y/y.


• The European Central Bank will act in a determined fashion to ensure that inflation expectations remain at levels compatible with price stability, ECB Governing Council member Miguel Angel Fernandez Ordonez said.

Asia-Pacific

• Japan’s Finance Minister Koji Omi said investors are taking risks in one-way bets against the yen. He said he is watching the yen’s foreign exchange levels “very closely.” At the same time, finance officials from New Zealand and South Korea said they were concerned about prolonged yen weakness and the possible unraveling of yen-funded carry trades. This would pose great risks to international financial markets, the officials said in a joint statement.


• Hiroshi Watanabe, Japan’s top currency policy official, will step down from his post after presiding over a 12% decline in the yen against the dollar, a Finance Ministry official said. Watanabe will be replaced as vice finance minister for international affairs by Naoyuki Shinohara, currently the director general of the Finance Ministry’s international affairs department.

FX Strategy Update