Expert Analysis of Today's Market

• The dollar was higher against most of its rivals as gold and crude oil prices continued to fall on further signs of slowing global economic growth. The only exception to the greenback’s advance was the yen that rose as US stocks dropped and investors unwound carry trades. The European currencies declined on further signs of deteriorating economic conditions. The euro fell to the lowest level since October 2007. Sterling dropped for an eight consecutive day as the Bank of England kept its key interest rate unchanged at 5.00% and August UK house prices plunged at the fastest annual pace since 1983. The Canada and Australian dollars fell as commodity prices continued their declines as the world economy slows.


• The EUR/USD broke the important 1.44-1.45 support after European Central Bank President Jean-Claude Trichet said the EMU is undergoing an “episode of weak activity,” indicating no further interest-rate hikes anytime soon. The ECB raised its inflationary forecast and lowered its growth outlook for the eurozone region, saying risks remain to the downside. The 1.44 support was from the long-term uptrend and the break indicates a trend reversal with bearish long-term implication for the EUR/USD. Support is at the 1.43-handle and the 1.45 is now resistance. Friday’s US employment report will likely be worse than forecast, particularly the ADP having overestimated employment growth for the last 12 months; thus, possibly leading to some profit-taking in the pair.

Financial and Economic News and Comments

US & Canada

• US nonfarm productivity rose at a more-than-expected 4.3% q/q annual rate in Q2, an upward revision from an original estimate of 2.2% q/q, data from the Labor Department showed. Nonfarm productivity rose 3.4% y/y, faster than the average 2.5% y/y growth rate between 2000 and 2007. Real (inflation-adjusted) compensation per hour in the nonfarm sector fell at a 1.3% q/q annual rate in Q2 versus an original estimate of -1.4% q/q. Real compensation per hour declined 0.2% y/y. Unit labor costs were down at a 0.5% q/q annual rate in Q2, compared with an initial estimate of a 1.3% q/q rise. Unit labor costs increased just 0.6% y/y, indicating the economic slowdown and weakening labor market are making it difficult for workers to command higher wages. Overall, the relatively improving figures suggest the Federal Reserve could be patient and hold interest rates steady while assessing economic and inflation risks.

• US initial jobless claims rose 15,000 to 444,000, a level usually consistent with declines in monthly employment, in the week ended August 30, data from the Labor Department showed. Continuing unemployment claims increased 6,000 to 3.435 million in the week ended August 23. Meanwhile, the ADP report on national employment suggested private sector payrolls declined 33,000 in August. Overall, the numbers, usually associated with recessionary levels, indicate the US labor market continues to deteriorate, reinforcing forecasts for Friday’s August job report from the Labor Department to show an eighth consecutive monthly payroll drops.

• The ISM US non-manufacturing composite index unexpectedly increased to 50.6 in August from 49.5 in July, the Institute for Supply Management reported. A reading above 50 signals expansion. The employment index declined, reinforcing evidence that companies are laying off more workers as business slows. The prices paid index fell 72.9 in August, the second straight decline from a record high reached in June but still at an extremely elevated level, from 80.8 in July. New orders increased to 49.7 from July’s 47.9. August’s overall performance shows a modest gain in US service industries with an indication of higher inflation and a weakening labor market.

• Federal Reserve Bank of Dallas President Richard Fisher said there is a 50% chance inflation will accelerate even amid slowing economic growth.


• Federal Reserve Bank of San Francisco President Janet Yellen said there are “substantial” risks of slower US economic growth, and inflation is likely to slow.

Europe

• Germany’s factory orders unexpectedly fell 1.7% m/m in July, an eighth consecutive monthly decline, following a 2.9% m/m fall in June, the Economy Ministry in Berlin said. Factory orders slid 0.7% y/y in July after dropping 6.0% y/y in June. The figures increase the chance the German economy is heading for a recession.


• UK house prices fell 12.7% y/y in August, the most since 1983, HBOS Plc reported. August house prices declined 1.8% m/m.

• The European Central Bank, as forecast, kept its benchmark lending rate at 4.25%, a 7-year high. ECB President Jean-Claude Trichet said the ECB remains focused on fighting inflation even after cutting its euroarea economic growth forecasts for 2008 and 2009. The ECB cut its 2008 economic growth forecast to about 1.4% from 1.8% and raised its inflation forecast to about 3.5% from 3.4%. Trichet also said the ECB will revamp money market rules and raise collateral charge, making it harder for financial institutions to exploit the ECB’s lending rules.


• The Bank of England maintained the bank rate at 5.00%, as forecast, on inflation concerns.


• Sweden’s Riksbank raised its key interest rate to 4.75%, a 12-year high, to fight accelerating inflation, saying it expects to keep rates steady for the rest of the year as the Swedish economy slows.

Asia-Pacific

• Australia’s trade balance unexpectedly turned to a deficit of A$717 million ($596 million) in July as oil imports rose and exports fell, compared with a revised surplus of A$351 million in June, the Bureau of Statistics said. Imports rose 4% to A$23.6 billion and fuel imports surged 29%, while exports declined 1% to A$22.9 billion in July. The trade balance may return to surplus in coming months as fallout eases from an explosion in Western Australia that cut off almost 30% of domestic gas supplied to that state, which generates about a third of Australia’s exports.

FX Strategy Update