• The dollar was lower versus the yen and euro on Tuesday but gained against sterling and the dollar-block
    currencies. The euro was boosted by stronger-than-expected EMU producer-price inflation. The yen gained
    against major currencies as worries about the credit crunch are deleveraging the global financial system. Part
    of this deleveraging is carry-trade unwinding. The Canadian dollar plunged as the Bank of Canada
    unexpectedly lowered interest rates 25 basis points to 4.25%.
  • After briefly breaking its uptrend, the EUR/USD has risen again the last two trading days. This could be part of
    a topping formation. If the 1.45 support is broken, it will indicate lower prices. We are selling one unit of the
    EUR/USD and one unit of the USD/JPY.

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  • The dollar index has fallen dramatically. Trying to pick a bottom may be too risky. However, it is possible that
    the index could see some temporary relief. The index has broken the short-term downtrend. This could be the
    beginning of a short-term greenback rally. It is not only the US that is starting to see the fallout from the
    subprime debacle. Other central banks may soon have to start monetary policy easing to avoid economic
    downturns and export problems due to over-shooting exchange rates, as today’s Bank of Canada rate
    decision showed.

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Financial and Economic News and Comments

US & Canada

  • The Bank of Canada unexpectedly cut its target rate a quarter-percentage point to 4.25% and said it now
    expects inflation over the next several months to be lower than was projected, The BOC cited global
    financial market difficulties and an increased risk to the prospects for demand for Canadian exports. The
    BOC still believes the economy is operating beyond full capacity.
  • San Francisco Fed President Janet Yellen said financial conditions and consumer spending have deteriorated
    more than she expected in the past month, signaling she will possibly support cutting interest rates next week.
    These developments necessitate some rethinking of my growth forecast, and have highlighted the downside
    skew in the risks to that forecast, Yellen said.
  • US Treasury Secretary Henry Paulson said he had no silver bullet to stop subprime-mortgage losses from


  • EMU producer-price inflation accelerated in October to the fastest pace this year, boosted by strong energy
    and food cost increase. Producer prices rose a stronger-than-expected 3.3% y/y, the most since December
    2006, the EU’s statistics office said.

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  • European Central Bank governing council member Christian Noyer questioned (rightly in our opinion) the
    notion that Europe could decouple from a US slowdown. He also said banks will be exposed to a triple
    shock of unwanted growth in their balance sheets, higher costs of capital and deterioration in credit quality,
    resulting in higher lending rates. How much the European economy suffers will depend on how credit
    markets evolve in the period to come, Noyer said. Europe’s economy may be more damaged than the
    European Union has forecast by fallout from the US housing slump as banks curb lending and accelerating
    price gains prevent central banks from cutting interest rates.


  • Australia’s retail sales growth slowed for a second consecutive month. Sales rose a less-than-expected 0.2%
    m/m in October from a revised 0.7% m/m increase in September, the Bureau of Statistics said.

FX Strategy Update