Expert Analysis of Today's Market

• The dollar rose against most key currencies Thursday as Libor soared to new highs, the commercial paper market slumped and the credit crunch deepened. Increased risk aversion supported the dollar as investors sold risky assets and repatriated the funds to US government papers, and international banks scrambled to find dollar funding in a dysfunctional interbank market. The yen gained as investors unwound carry trades. US stocks fell sharply as fears about worsening credit spreads and recession outweighed the prospect of a quick passage of the Bush Administration’s financial-market rescue bill. Sterling fell as UK house prices posted the biggest annual drop since at least 1991. The euro declined against its rivals as the European Central Bank saw increased risk to European economic growth. The Australian and Canadian dollars fell on falling commodity prices and global recessionary concerns.
• The EUR/USD fell to a 13-month low after ECB President Jean-Claude Trichet said “the economic outlook is subject to increased downside risks, mainly stemming from a scenario of ongoing financial market tensions affecting the real economy more adversely than currently foreseen.” The pair broke the long-term uptrend at 1.39-1.40, indicating the EUR/USD bull market is over and a protracted bear market is likely. There are supports at 1.37 and 1.35 and resistances at 1.40 and 1.43. There may be a test of the 1.40-area. If the employment report tomorrow is weak, we will try to sell the pair on strength.

Financial and Economic News and Comments

US & Canada

• The US Senate passed the $700 billion financial-rescue bill Wednesday night with a 74-25 vote, leaving endorsers optimistic that the strong approval, coupled with popular additions, would lead to the House of Representatives acceptance by Friday and end the legislative uncertainty that has rocked the financial markets.
• US initial jobless claims unexpectedly increased 1,000 on a seasonally-adjusted basis to 497,000, the highest since September 2001 due to layoffs and hurricane effects, in the week ending September 27, following the previous week’s revised figure of 496,000, according to data from the Labor Department. The roughly non-seasonally adjusted 45,000 initial jobless claims, due to the effects of Hurricanes Gustav and Ike, were added to the total, the government said. Once that figure is put through the adjustment process, seasonally-adjusted claims would have been around 440,000. The 4-week moving average of new claims rose 11,500 to 474,000, the highest since October 2001 and above levels typically consistent with drops in monthly employment. Continuing jobless claims in the week ending September 20 surged 48,000 to 3,591,000, the highest since September 2003, suggesting it is more difficult for the unemployed to find new work. The 4-week moving average of those continuing claims increased 46,750 to 3,528,500. The unemployment rate for workers with unemployment insurance was unchanged at 2.7%. Overall, the data indicate the trend remains weak for the US labor market, suggesting Friday’s employment report will show a ninth straight monthly payrolls decline.

• US factory orders dropped a more-than-expected 4.0% m/m in August, the biggest decline since October 2006, following a sharp, downwarldy revised 0.7% m/m increase, data from the Commerce Department showed. Non-defense capital goods orders excluding aircraft, a barometer for capital spending by businesses, fell 2.4% m/m in August, after increasing 0.3% m/m in July. Non-durable goods factory orders fell 3.3% m/m, following July’s 0.8% m/m increase. Orders for goods made in the transportation sector dropped 9.1% m/m, after rising 2.7% m/m. Excluding transportation orders, overall factory orders declined 3.3% m/m in August. Capital goods orders fell 6.0% m/m, following July’s 0.4% m/m increase. Consumer-goods orders decreased 4.7% m/m in August, with consumer durable goods orders dropping 5.8% m/m and consumer non-durables falling 4.5% m/m. Overall, August dismal figures indicate continued weakness in US manufacturing and the overall economy.

• US home prices fell in 24 of 25 US metropolitan areas in July, led by declines in Las Vegas and the coastal cities of California. Las Vegas had the biggest decline on a per-square foot basis, dropping 33% y/y in July, Radar Logic Inc. reported. Los Angeles, Phoenix, Sacramento and San Francisco each fell about 28%. Three of the five worst-performing markets were in California.
• The US commercial paper market shrank by $94.9 billion to $1.607 trillion in the week ending Wednesday, the largest decline ever recorded by the Federal Reserve since 2001. The sharp drop brings the cumulative contraction to $208 billion over the last three weeks as money market funds continued to avoid debt other than that issued by the US government.
• The International Monetary Fund said the US economy may fall into a recession as the financial crisis worsens. “The financial turmoil that began in the summer of 2007 has mutated into a full-blown crisis,” the IMF said in its semiannual World Economic Outlook. There is “a substantial likelihood of a sharp downturn in the United States,” the IMF said.

Europe

• Euro-area producer prices fell 0.5% m/m in September, following August’s upwardly revised 1.3% m/m increase, Eurostat reported. The PPI slowed to 8.5% y/y in September, down from August’s revised 9.2% y/y.
• The Eurpean Central Bank kept its benchmark interest rate unchaged at 4.25%, as forecast. ECB President Jean-Claude Trichet said policy makers discussed “the recent intensification of the financial market turmoil and its possible impact on economic activity and inflation, recognising the extraordinarily high level of uncertainty stemming from latest developments.” He said the euro-area economic activity is “weakening, with contracting domestic demand and tighter financing conditions,” addding that “upside risks to price stability have diminished somewhat, but they have not disappeared.” The ECB is “determined to secure price stability in the medium term and will continue to monitor very closely all developments over the period ahead,” Trichet said.
• UK house prices dropped 12.4% y/y to £161,797 ($287,658) in September, the largest annual decline since at least 1991, Nationwide Building Society said. House prices declined 1.7% m/m.

• The UK’s building industry contracted for a seventh month in September, with the UK construction PMI declining to 38.8 in September, following 40.5 in August, according to a survey by the Chartered Institute of Purchasing and Supply and Markit.

Asia-Pacific

• The monetary base in Japan increased 0.9% y/y in September, standing at ¥88.37 trillion, following a 0.2% y/y decline in August and a 0.7% y/y fall in July, the Bank of Japan said. Seasonally adjusted, the monetary base surged 15.8% y/y in September, standing at ¥89.398 trillion, following a 5.7% y/y increase in August.
• China’s manufacturing activity contracted for a second month in September. The CLSA Chinese manufacturing PMI fell to a seasonally adjusted 47.7 in September, the lowest level since April 2004, from 49.2 in August, according to a CLSA Asia-Pacific Markets survey of purchasing managers.

• Australia’s trade balance turned to a more-than-expected A$1.36 billion ($1 billion) surplus in August, following a revised A$697 million deficit in July, data from the Bureau of Statistics showed. Exports rose 6% to A$24.6 billion in August, while imports fell 2% to A$23.2 billion.

FX Strategy Update