Expert Analysis of Today's Market

• The dollar plunged and the dollar index fell the most in a decade on Wednesday. The Federal Reserve lowered its benchmark interest rate a 50-basis point to 1.00% and signaled further reductions as downside risks to the US economy remain. Stocks and commodity prices were mostly higher as investors bought riskier assets on bets the central banks’ liquidity boosting actions will unclog the international financial system. The rise in equity markets helped boost risk appetite and stem the tide of deleveraging that has boosted the dollar. The greenback has also become extremely overbought, requiring some consolidation following its last 2- month gains. Falling versus most key currencies on increased risk appetite, the yen, however, was little changed against the slumping dollar. The Australian and Canadian dollars rose for a second day on higher commodity prices. Sterling rallied from a 6-year low.


• The EUR/USD gained for a second day following a nearly 20-cent drop earlier in October. The 50 basis-point Fed rate cut today will likely match the European Central Bank’s rate cut next week. Both economies will likely experience serious recession, but the US may recover sooner as it entered the recession before Europe. The EUR/USD sharp downtrend has not been broken yet. The pair is extremely oversold; thus, further consolidation is possible if the stock market rally continues. There are resistances from this downtrend in the 1.30- and 1.35-areas. There is support in the 1.25 area.

Financial and Economic News and Comments

US & Canada

• US durable goods orders unexpectedly increased 0.8% m/m to a seasonally adjusted $207.81 billion in September, boosted by higher car and airplane orders, following a downwardly revised 5.5% m/m fall in August, the Commerce Department said. A key barometer of business equipment spending -- orders for nondefense capital goods excluding aircraft -- declined 1.4% m/m after August’s 2.2% m/m fall. Excluding transportation, durable goods orders fell a less-than-expected 1.1% m/m in September following a downwardly revised 4.1% m/m decline in August. Durable goods orders fell 3.6% y/y, but declined only 0.6% y/y excluding transportation. Despite the September unexpected 0.8% m/m increase, the trend is down amid the US recessionary economy and credit crisis. The advance GDP data Thursday will show contraction in Q3.

• The Federal Reserve, as forecast, cut its benchmark interest rate a 50-basis point to 1.00%, a 4-year low, in an effort to avert the US prolonged recession and worldwide recession. “Recent policy actions, including today’s rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth,” the Federal Open Market Committee said in a statement. The Fed said it expects “inflation to moderate in coming quarters to levels consistent with price stability” and noted that “downside risks to growth remain,” signaling possible further rate cuts.

Europe

• Germany’s consumer-price inflation growth rate slowed to 2.4% y/y in October, as forecast, following September’s 2.9% y/y rate, according to preliminary data from the Federal Statistical Office. The CPI contracted 0.2% m/m in October, in line with expectations, following September’s 0.1% m/m fall. The CPI excluding energy and seasonal food declined 0.1% m/m but grew 1.7% y/y in October.


• In EU harmonized terms, the German CPI growth rate decelerated more than expected to 2.5% y/y in October, down from September’s 3.0% y/y rate, and the CPI fell a more-than-expected 0.3% m/m in October, following September’s 0.1% m/m decline.


• Overall, the German CPI rate slowed in October, supporting an argument for further ECB interest-rate cuts to alleviate a eurozone economic downturn and a global economic slowdown.

• UK mortgage approvals stayed near a record low, inching higher to 33,000 September, up from 32,000 in August, the lowest since comparable data began in 1999, the Bank of England said. Consumer borrowing increased 0.1% m/m in September, the weakest pace since April 1993. Despite the slight improvement, conditions will likely worsen and the Bank of England will likely cut its key interest rate further as the UK slips into a recession.

Asia-Pacific

• Japan’s industrial production increased a more-than-expected 1.2% m/m in September after falling 3.5% m/m in August, data from the Ministry of Economy, Trade and Industry showed. The September IP unexpectedly climbed 0.4% y/y following August’s 6.9% y/y drop. However, IP gains are unlikely to be sustained in November as the global financial crisis chokes off demand from Japan.

FX Strategy Update