Expert Analysis of Today's Market

• The dollar fell broadly on Tuesday on possible downgrade of $12 billion of bonds backed by sub-prime mortgages and rising protectionism fears as China’s politically sensitive trade surplus surged in June. Sterling traded at a 26-year high. The low-yielding yen halted its slide and rose against major currencies as investors reduced their risk exposure.


• The EUR/USD rose to a record high at 1.3738 today. This is a potential double-top as the pair is overbought. However, the momentum is strong and it is difficult to predict how the sub-prime mortgage debacle will affect US consumers. Longer term the biggest risk to the dollar is protectionism. We are buying 1 unit of the EUR/USD and selling 1 unit of the GBP/USD.

Financial and Economic News and Comments

US & Canada

• Standard & Poor’s may cut the credit ratings on $12 billion of bonds backed by sub-prime mortgages, a move that may force investors to dump the securities and exacerbate losses at hedge funds and securities firms. Concerns about US sub-prime mortgage risks could spread to other markets. Credit spreads are widening along with a spike in risk aversion.


• In a speech to the National Bureau of Economic Research in Cambridge, Massachusetts today, Federal Reserve Chairman Ben S. Bernanke said inflation expectations “remain imperfectly anchored” in part because the public does not know the Fed’s goal for prices. What inflation rate the Fed prefers “is not fully known by private agents,” Bernanke said. He did not comment on the outlook for the US economy or interest rates but seemed to argue for an explicit inflation target policy. The dollar and bond yields, down before Bernanke’s remarks, were little changed after his statement’s release.


• The Bank of Canada raised its benchmark interest rate for the first time in more than a year and indicated a further increase may be needed to slow inflation. The target rate for overnight loans increased 25 basis points to 4.5%, a 6-year high and 75 basis points less than the US Fed funds rate. “Some modest further increase in the overnight rate may be required to bring inflation back to the target over the medium term,” the BOC said.

Europe

• Germany’s Q2 GDP rose 0.4% as construction spending declined, after growing 0.5% in Q1, the Berlin-based DIW institute said.


• German economic growth probably slowed slightly in Q2 as construction spending declines, the Berlin-based DIW institute said. Germany’s Q2 GDP rose 0.4% after growing 0.5% in Q1, the DIW said.


• German wholesale prices slowed to 1.9% y/y in June, the lowest rate since August 2005, from 2.4% y/y in May.


• UK’s trade deficit shrank more than expected in May to the narrowest in more than 1 1/2 years on strong exports. The goods trade deficit was £6.3 billion ($12.7 billion) in May, the least since October 2005, down from a revised £6.9 billion in April, the Office for National Statistics said.


• UK retail sales rose a stronger-than-expected 3.0% y/y in June, but the British Retail Consortium insisted that its latest sales numbers showed consumer confidence was hurt by the recent interest-rate increases.

Asia-Pacific

• Australia’s business confidence remained high in June. The sentiment index was unchanged at 15 from May, seasonally adjusted, according to National Australia Bank Ltd. A reading above zero indicates business expansion. The business conditions index fell 1 point in June to 16.


• China’s politically sensitive trade surplus surged much more than expected in June. The surplus, indicating very strong but unbalanced economic growth, is likely to increase pressure on China to appreciate the yuan. June’s trade surplus widened to $26.91 billion on strong exports, bringing the first-half surplus to $112.53 billion, the General Administration of Customs said. China’s exports in June totaled $103.27 billion, up 27.1% from the same month last year. Imports in June totaled $76.36 billion, up 14.2% from a year earlier. For the January-June period, China’s exports totaled $546.73 billion, rising 27.6% from the year-earlier period, while imports reached $434.2 billion, up 18.2%.

FX Strategy Update