Expert Analysis of Today's Market

• The dollar hit a 2-month low against the yen on Tuesday as risk aversion rose on concerns that problems in the US subprime mortgage market will spread further into other segments of the credit market and reduce economic activity. Sterling hit a 26-year high overnight versus the dollar before gains were trimmed after UK factory orders unexpectedly fell in July. The dollar-block currencies were all strong. New Zealand’s dollar rose above $0.81 for the first time since it started trading freely in 1985 and Australia’s currency gained to a new 18-year high on speculation the nations’ central banks will raise interest rates. The USD/JPY tumbled after support at 121 was broken triggering stop-loss orders. We are selling the pair.


• Since hitting 1.38 on July 13, the EUR/USD has been trading in a narrow trading range currently testing resistance at 1.3850. The pair is in a solid uptrend and would have to fall below 1.37 before any change in trend may occur. Yield and growth differentials support the EUR/USD while lower equity prices pressure the USD/JPY.

Financial and Economic News and Comments

US & Canada

• Countrywide Financial Corp., the biggest US mortgage lender, reported its third straight decline (33%) in quarterly profit on increases in late loan payments and reduced its forecast for earnings this year.


• Canadian retail sales in May rose at the fastest pace in almost a decade, adding to pressure on the Bank of Canada to keep raising interest rates. Retail sales surged 2.8% m/m C$35 billion ($33.7 billion), Statistics Canada reported.

Europe

• UK factory orders dropped to -6 in July, down from 8 in June. Export orders fell to -8 from zero in June. The gauge of average prices in the next three months fell to 11 in July, from 16 in June, the Confederation of British Industry said.


• Royal Bank of Scotland Group Plc said its overall PMI index for the eurozone fell slightly more than expected to 57.3 in July from 57.8 in June. The manufacturing index fell to 54.8 in July from 55.6 in June while its services index declined to 58.1 from 58.3. New manufacturing orders fell to their lowest since November 2005, while in the services sector orders reached the highest level since June 2006. The report still indicates healthy growth in the EMU, but the decline in manufacturing orders indicates the higher euro is reducing manufacturing demand.


• The euro’s appreciation has been “very gradual” so far and “the euro region’s exporters haven’t suffered,” ECB Executive Board member Jürgen Stark said in an interview with the Frankfurter Allgemeine Zeitung. “It would be problematic if we started seeing abrupt changes” in the exchange rate, Stark said.

Asia-Pacific

• The yuan traded near the highest since the end of a dollar peg in July 2005 on speculation China will pursue faster currency gains as part of measures to curb economic growth and inflation.

FX Strategy Update