Expert Analysis of Today's Market

• The dollar rallied against its rivals Tuesday as LIBOR rates rose to record levels in the latest sign of the extreme liquidity squeeze in the global financial system. The greenback was supported by investors’ flight to quality flows and international banks demand for dollar funding. The yen fell on increased risk appetite as US stocks rallied on hopes the US Congress will finally approve the $700 billion financial-rescue bill.
• The EUR/USD plunged the most since 1999 after France and Belgium led a state-backed rescue of Dexia SA. The capital infusion for Dexia follows earlier rescue of Fortis and other troubled financial institutions, increasing speculation the European financial sector is in worse shape than previously thought. The EUR/USD was also pressured by speculation the European Central Bank will lower interest rate as the banking crisis has spread to Europe. The pair easily broke the 1.43-area support and will likely test the important 1.40-1.39-area support, which is the support from the long-term uptrend. If this support is broken, the EUR/USD will fall to 1.35 in the short run and start a new downtrend.

Financial and Economic News and Comments

US & Canada

• The S&P/Case-Shiller US home-price indexes showed home prices in 10 major metropolitan areas dropped a record 17.5% y/y and 1.1% m/m in July, marking a 10th consecutive monthly record decline. In 20 major metropolitan areas, home prices dropped a record 16.3% y/y and 0.9% m/m. The indexes showed July home prices continued to drop at a record pace, although the pace of declines was slower. However, there is no evidence of a bottom yet.

• The Conference Board consumer confidence index unexpectedly rose to 59.8 in September, following a revised 58.5 in August. The present situation index remained weak, falling to 58.8 from August’s 65.0. Consumer expectations rose to 60.5 from 54.1. “September's increase in the Consumer Confidence Index™ was due solely to an improvement in the short-term outlook. However, these results did not capture all of the tumultuous events in the financial sector this month, and until the dust settles a bit more, we will not know the full impact on consumers’ expectations,” said Lynn Franco, director of the Conference Board Consumer Research Center. Consumer confidence will likely drop in October in the face of the current US financial crisis.
• The US Chicago PMI eased to 56.7 in September, still above 50 indicating economic activity expansion in the Chicago area, following 57.9 in August, the Federal Reserve Bank of Chicago said. The new orders index fell to 53.9 from August’s 60.2, while the employment index rose to 49.1 from 39.2. The prices paid index remained nearly unchanged at 80.7 in September from 80.6 in August, marking a seventh straight month above 80.

• President George W. Bush used Monday’s stock-market decline to argue the need for urgent congressional action on a financial-rescue plan, saying a new bailout solution could begin to move as soon as Wednesday. “The reality is that we’re in an urgent situation and consequences will grow worse each day if we do not act. If our nation continues on this course, the economic damage will be painful and lasting,” he said.
• The FDIC will ask for an increase in the US federal deposit insurance limit to $250,000 from $100,000, a move supported by John McCain and Barak Obama. They hope such a move would reassure nervous Americans.
• The Canadian GDP grew a more-than-expected 0.7% m/m in July, the most since March 2004, signaling a possible economic rebound from the first half of this year, data from Statistics Canada showed. Falling petroleum prices led to a 0.2% m/m decline in industrial product prices in August, and a 7.7% m/m drop in raw materials prices.

Europe

• The euro-area inflation rate fell to 3.6% y/y in September, slowing for a second month and the lowest rate since April, from 3.8% y/y in August, according to a flash estimate released by Eurostat.
• German unemployment fell 29,000, more than expected, to 3.18 million in September, after dropping 40,000 in August, data from the Federal Labor Agency showed. “We’re doing quite well,” Economy Minister Michael Glos said. The jobless rate is at a 16-year low of 7.6% in September following August’s upwardly revised 7.7%.

• The UK economy grew at the weakest annual rate since 1992 in Q2 2008. The UK Q2 GDP rose 1.5% y/y, exceeding the initial estimate of 1.4% y/y, the Office for National Statistics said. On the quarter, the economy did not expand, as previously measured.
• The UK current account deficit widened to £11 billion ($19.8 billion), the largest in three quarters, the statistics office reported.

Asia-Pacific

• Japan’s industrial output fell 3.5% m/m in August, the sharpest fall since January 2001, the Ministry of Economy, Trade and Industry said. The METI expects output to rise 1.6% m/m in September but decline 0.1% m/m in October.
• Japan’s unemployment rate rose to a 2-year high of 4.2% in August from 4.0% in July, the Statistics Bureau said. The number of unemployed persons stood at 2.72 million, a 9.2% y/y rise, while the number of employed persons declined 0.6% y/y to 64.05 million.
• Japan’s household spending declined a more-than-expected 4.0% y/y to ¥291,154 (US$2,781) in August, the most since September 2006, the Statistics Bureau said.
• Japanese housing starts rose a more-than-forecast 53.6% y/y in August, the Ministry of Land, Infrastructure, Transport and Tourism said. The rise, however, was a reaction to declines in the latter half of last year following the introduction of tighter building rules.
• Japan’s small business confidence declined to 41.4 in September, according to a survey by Shoko Chukin Bank. The manufacturing component fell to 39.9 in September from 42.2 in August, while the non-manufacturing index slipped to 40.5 from 40.6. The index for October is projected to increase in the headline indicator to 42.1, according to the report.
• Today’s Japanese economic figures add to evidence that the Japanese economy is in a recession, ending a growth cycle that started in early 2002.
• Economic and Fiscal Policy Minister Kaoru Yosano said US lawmakers’ rejection of the $700 billion financial-rescue plan will have a “significant effect” on the world economy.

FX Strategy Update