Expert Analysis of Today's Market

• The dollar traded mostly lower on Tuesday. The European currencies and Canadian dollar gained for a third day, while the Australian dollar declined. After its recent weakness, the yen rose against most key currencies today. The Federal Reserve and Treasury introduced new programs to ease strains in the consumer credit and mortgage-backed securities markets. The Fed committed up to $800 billion to unfreeze credit for homebuyers, consumers and small businesses. The Fed’s recent huge undertakings and the improved US stock market have reduced demand for the greenback as a safe haven. The new Fed facilities will push the Fed’s already ballooning balance sheet toward $3 trillion from about $1 trillion. The enormous increase in money supply may start to worry investors regarding the future inflation path and the dollar value.


• The EUR/USD advanced for a third day. Revised GDP figures of Germany and the US showed both economies contracted in Q3. The EUR/USD wavered around the 1.30-1.31 resistance as the US stock market fluctuated between modest losses and gains. The pair has been trading sideways since late-October. Falling stocks or commodities did not seem to cause serious EUR/USD declines as they used to, which could signal the pair is finding a bottom. Strong support exists in the 1.24-area. If this is broken, another leg down will likely occur; if not, a test of the downtrend may be possible.

Financial and Economic News and Comments

US & Canada

• US GDP growth was revised down to a -0.5% annual rate in Q3, matching expectations, from the -0.3% rate estimated last month, Commerce Department data showed. The GDP grew 0.7% y/y. Almost all major categories of GDP were revised downward, with the largest adjustment to personal consumption as it subtracted 2.7 points from Q3 GDP growth versus the original estimate of -2.3. The only major component of GDP that was revised upward was inventories, which added 0.9 points to GDP growth rather than the original estimate of 0.6. The biggest drag on the Q3 GDP was personal consumption, while the largest positive contributors were net exports, government spending, and inventories. The GDP price index was unrevised at a 4.2% annual rate in Q3. The US Q4 GDP will likely show the worst GDP contraction since 1982.

• US home prices continue to decline as the US recession worsens. The Case-Shiller national index posted a 16.6% y/y drop in home prices in Q3, worse than a 15.1% y/y fall in Q2. The Case-Shiller indexes showed home prices in 10 major metropolitan areas dropped 18.6% y/y and 1.9% m/m in September, marking the 10- city index’s 12th consecutive monthly record decline. In 20 major metropolitan areas, home prices dropped a record 17.4% y/y and 1.8% m/m in September. Home prices fell a seasonally-adjusted 1.8% q/q in Q3 after declining 1.4% q/q in Q2, according to the Federal Housing Finance Agency home price index. In another sign of the weakening US housing market, D.R. Horton Inc.’s fiscal Q4 net loss widened sharply on $1.15 billion in impairment charges as the homebuilder posted its sixth consecutive quarterly loss.

• US consumer confidence improved slightly in November, with the Conference Board consumer confidence index increasing to 44.9 from October’s upwardly revised 38.8. The present situation index declined to 42.2 in November from 43.5 in October. Consumer expectations for the state of economic activity over the next six months rose to 46.7 from October’s 35.7.

• Manufacturing activity in the central Atlantic region deteriorated further in November, with the Richmond Fed manufacturing index dropping to -38, the lowest level on record since the early 1990s, following -26 in October.


• The financial crisis will likely push the world’s developed countries into their worst recession since 1982, the Organisation for Economic Co-operation and Development (OECD) said, expecting economic output to contract 0.4% in 2009 and to rebound in 2010. In its report on the outlook for the global economy, the OECD urged further interest-rate cuts and growth-boosting measures.


• Canada’s retail sales gained a more-than-expected 1.1% m/m to C$36.3 billion ($29.7 billion) in September, the most since January, following August’s 0.3% m/m decline, data from Statistics Canada showed. Retail sales less autos increased a more-than-expected 0.8% m/m in September.

Europe

• Germany’s GDP declined a seasonally adjusted 0.5% q/q in Q3, following a 0.4% q/q decline in Q2, the Federal Statistics Office said. Exports fell 0.4% q/q and imports rose 3.8% q/q, with net export dragged down growth for the first time in a year. The second consecutive contraction in GDP indicates the German economy is technically in a recession.


• The GfK German consumer confidence index unexpectedly increased to 2.2 in December from 1.9 in November, GfK AG reported. The measure of consumer willingness-to-buy surged to -6.7 from -18.2. Income expectations rose to -6.9 from -12.9. However, the gauge of business cycle expectation fell to -30.1, the lowest since 1991, from -27.5.

• Bank of England Governor Mervyn King said UK financial institutions may still need more capital and the “single most pressing challenge” facing policy makers is to revive the flow of credit through the economy.


• European Central Bank council member Ewald Nowotny said he favors the bank retaining some “firepower” as it tackles the recession, seeing no need for further aggressive interest-rate cuts yet.

Asia-Pacific

• In the Bank of Japan report for November, the BOJ downgraded its assessment of Japanese exports and output for the near future, saying Japanese financial conditions are deteriorating due to spikes in material and energy prices earlier in the year, along with dropping demand from Japanese trading partners.


• The Reserve Bank of New Zealand said inflation will level off to 2.7% in two years, according to the Q4 survey. Business managers said inflation will average at 2.8% over the coming year. New Zealand’s inflation rose 5.1% y/y in September, an 18-year high.


• China’s inflation may be under 6% this year and fall to 3% for 2009, said Zhang Jianhua, the head of the central bank’s research bureau. Meanwhile, the OECD said China has room to keep loosening monetary policy to support growth as the global economy weakens.

FX Strategy Update