Expert Analysis of Today's Market

• The dollar fell versus the yen but rose against other key currencies in NY trading Tuesday. Risk aversion supported the yen and greenback as US stocks and crude oil futures declined on global recession concerns. The higher-yielding currencies fell as their central banks were seen lagging US recession fighting efforts. The euro declined to a 20-month low. Sterling fell following Bank of England Governor Mervyn King’s comment that the pound could fall faster and more than expected. The Canadian dollar dropped to the lowest in more than three years after the Bank of Canada cut its benchmark interest rate for the fifth time since December, to 2.25% from 2.50%. The Australian dollar declined after the Reserve Bank of Australia said risks to the economy made a “strong economic case” for its 1 percentage-point rate cut to 6.00% on October 7.


• The EUR/JPY fell to the lowest level since June 2005 on further carry-trade unwinding. Diminishing European growth and interest-rate advantage also pressured the pair. Since August, the pair had declined nearly 23%. The EUR/JPY is currently oversold, but its downward momentum is strong. The pair is testing the 130 support. If this is broken, the next support is 125.

Financial and Economic News and Comments

US & Canada

• The Federal Reserve announced the creation of the Money Market Investor Funding Facility (MMIFF), which will support a private-sector initiative designed to provide liquidity to US money market investors. “The shortterm debt markets have been under considerable strain in recent weeks as money market mutual funds and other investors have had difficulty selling assets to satisfy redemption requests and meet portfolio rebalancing needs. By facilitating the sales of money market instruments in the secondary market, the MMIFF should improve the liquidity position of money market investors, thus increasing their ability to meet any further redemption requests and their willingness to invest in money market instruments,” the Fed said in a statement. The Fed will provide up to $540 billion to aid money-market mutual funds beset by redemptions.


• The Bank of Canada cut its overnight rate target a quarter-percentage point to 2.25%, the lowest since October 2004, signaling further rate cuts. “These actions provide timely and significant support to the Canadian economy,” the BOC said in a statement, referring to its own rate cuts and the joint move. “Some further monetary stimulus will likely be required to achieve the 2 per cent inflation target over the medium term. The evolution of the financial crisis, its impact on the global economy and the timing of the effects of the various extraordinary measures being taken to address it pose significant risks to the projection on both the upside and the downside.”

Europe

• In the IMF October 2008 Regional Economic Outlook for Europe (REO), the International Monetary Fund said activity in advanced European economies will stagnate in the near-term with growth forecast at 1.3% in 2008 and 0.2% in 2009. Although the global financial crisis will cause a sharp deceleration of economic activity, the comprehensive crisis management actions being undertaken should allow Europe to avoid a worse outcome, the IMF said, calling for enhanced coordination of measures. The IMF projected inflation will drop to levels below central bank objectives in most of Europe’s advanced economies in 2009.


• As governments worldwide introduced measures to boost bank balance sheets, the 3-month London interbank offered rate (Libor) for borrowing in euros fell 3 basis points to 4.96%, the lowest level since the collapse of Lehman Brothers Holdings, the British Bankers’ Association said. The 3-month Libor for borrowing in British pounds declined to 6.09%. The 3-month Libor for borrowing in US dollars dropped to 3.83%.

• The balance of UK firms who had seen total order book levels deteriorate over the third quarter fell to -39%, the lowest level since October 2003, the Confederation of British Industry quarterly industrial trends survey showed. The CBI quarterly gauge of UK business optimism dropped to the lowest level since July 1980.


• Bank of England Governor Mervyn King said the BOE will act “promptly” as a UK recession looms. “The combination of a squeeze on real take-home pay and a decline in the availability of credit poses the risk of a sharp and prolonged slowdown in domestic demand,” King said. The BOE Monetary Policy Committee “will act promptly to ensure that inflation remains on track to meet our target.” “Over the past month, the economic news has probably been the worst in such a short period for a very considerable time,” he said. “Indeed, it now seems likely that the U.K. economy is entering a recession. The balance of risks to inflation in the medium term shifted decisively to the downside.”

Asia-Pacific

• The Reserve Bank of Australia saw a “strong economic case” for its 100 basis-point rate cut to 6.00% on October 7. “The material change to the balance of risks surrounding the outlook for growth and inflation in Australia meant that a significantly less restrictive stance of monetary policy was now appropriate,” RBA Board members said in minutes of their October 7 meeting, released today. According to the minutes, “an easing of 100 basis points would bring forward some of the easing markets had already priced in for following months. The increased downside risks to growth and the improved prospects for lower inflation meant that there was a strong economic case to do so.”


• RBA Governor Glenn Stevens said threats of a “global catastrophe” have reduced in recent weeks as global policy-makers work to restore liquidity and confidence in the financial system. “At moments like this, it is hazardous to make predictions. However, it seems to me that the key elements of dealing with the root issues in the crisis are starting to come into place. Policy-makers in the major countries do ‘get it’. The plans are not precisely uniform across countries – that is never achievable anyway – but we can, I think, see the shape of a broad common outline. It addresses the issues of liquidity, capital and confidence. There is much more work to be done yet on the design details, and one area in which further international co-operation would be helpful is in the area of making these various guarantee arrangements broadly consistent. But the world is, it seems to me, getting on to a better path. As a result, the likelihood of a global catastrophe has in fact declined over the past couple of weeks,” Stevens said to members of the Trans-Tasman Business Circle.

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