Expert Analysis of Today's Market

• The dollar and yen fell on Monday as investor risk appetite increased on rallying equity markets, following the US government bailout and cash injection in Citigroup. US stocks had the biggest two-day rally since 1987 after the government said it will guarantee $306 billion of troubled Citigroup assets, President-elect Barack Obama introduced his economic team and lawmakers pledged to pass another economic stimulus. The euro and sterling gained following reduced demand for the greenback as a haven, despite Germany’s weakest business confidence since 1993 and the announcement from the UK’s Debt Management Office it will issue a record £146.4 billion ($222 billion) of bonds to mitigate the UK recession. The stock-market recovery pushed the yen lower against all the major currencies. The Canadian dollar advanced as commodity prices increased and crude oil rose over 9% to $54.50 a barrel.


• The AUD/USD gained on the increases in risk appetite and commodity prices. Having depreciated nearly 40% from the July high to the October low, the pair has attempted to form a bottom in the 0.60-area, the level defended by the Reserve Bank of Australia. The AUD/USD is oversold and we buy the pair with stop at 0.5950. Strong support exists at the 0.60-handle and strong resistance at the 0.70.

Financial and Economic News and Comments

US & Canada

• US existing home sales fell a more-than-expected 3.1% m/m to an annualized rate of 4.98 million in October, following September’s downwardly revised rate of 5.14 million, according to the National Association of Realtors. Existing home sales declined 1.6% y/y. Almost all the decline in sales was due to single-family units; sales of condos/co-ops were essentially unchanged. Sales were down in all major regions. The median price of an existing home fell to $183,300 in October and dropped 11.3% y/y, the biggest decline on record. Singlefamily home prices fell 11.2% y/y. The months’ supply of existing homes at the current sales rate rose to 10.2 in October from 10.0 in September. The months’ supply of single-family homes increased to 9.6 from September’s 9.4. Further price declines are likely as the sector continues to work off excess inventory.


• The Chicago Fed national activity index improved to -1.06 in October from a previous -3.11, driven by an increase in industrial production, while the other three broad categories made negative contributions, the Federal Reserve Bank of Chicago said.


• President-elect Barack Obama, saying solving the economic crisis requires fresh thinking from the nation’s best minds, announced his economic team today, which includes New York Fed President Timothy Geithner as Treasury Secretary, former Treasury Secretary Larry Summers as head of the National Economic Council, University of California at Berkeley economist Christina Romer as head of the White House Council of Economic Advisers, and Melody Barnes as director of the Domestic Policy Council. “We have to make sure that the stimulus is significant enough that it really gives a jolt to the economy. We are going to do what’s required to jolt this economy back into shape,” Obama said. Regarding the auto industry, he said “we can’t allow the auto industry to vanish, but we can’t just write a blank check to car makers.”

Europe

• The eurozone current account deficit widened to €10.6 billion in September from August’s revised €5.3 billion level due to a surge in capital outflows, the European Central Bank said. In non-seasonally adjusted terms, the current account deficit remained unchanged at €6.0 billion.


• GEurozone industrial new orders contracted a more-than-expected 3.9% m/m in September, following August’s downwardly revised 1.5% m/m fall, Eurostat reported. Industrial new orders declined 1.1% y/y, following August’s upwardly revised 6.4% y/y drop.


• Germany’s business confidence worsened in November as the Ifo business climate index dropped more than expected to 85.8, the lowest reading recorded since February 1993, following 90.2 in October. The business conditions index declined to 94.8 in November, down from 99.9 in October, while the business expectations index fell to 77.6, down from October’s 81.4.

• UK Chancellor of the Exchequer Alistair Darling, in his pre-budget report, unveiled £20 billion (1% of GDP) in fiscal stimulus to the economy to combat the recession. He predicted the economy may contract as much as 1.25% in 2009, the most since 1991. The stimulus package includes a 250 basis-point cut to the Value Added Tax to 15.0% which is expected to put £12.5 billion in the hands of consumers and an additional £5 billion in spending efficiencies. Darling also introduced a new 45% tax rate bracket on incomes of £140 billion per year.

Asia-Pacific

• Prime Minister Kevin Rudd said Australia will have a surplus in 2009. “We are projecting a modest surplus into 2009. Under current circumstances, therefore, we don’t see the need to borrow for the purposes of investing for growth in the economy for the future,” he said.


• Thailand’s economy expanded 0.6% q/q in Q3, the slowest rate in the last three years, following 0.8% q/q growth in Q2, the National Economic and Social Development Board reported. The economy grew 4.0% y/y.

FX Strategy Update