• The dollar fell against major currencies as crude oil prices rose above $122 a barrel Tuesday. Stronger-thanexpected eurozone producer price inflation supported the euro, making any easing by the European Central Bank more distant. The dollar block currencies advanced on rising commodity prices. The low-yielding yen and Swiss franc rose on increased risk aversion but pared most of their gains as US stocks reversed early losses.
  • The USD/JPY fell the most in more than three weeks after Fannie Mae reported a larger-than-expected $2.19 billion loss. However, the pair pared losses after US stocks gained in late trading. The pair is overbought, close to crucial resistance, and strongly correlated with the US equity market. The stock market looks likely to continue its rally, making the USD/JPY likely to penetrate the resistance from its long-term downtrend. There are major resistances in the 105.50 and 107.50 areas.


  • The chart below shows a close correlation between the US stock market and the yen.


Financial and Economic News and Comments

US & Canada

  • US home prices fell 7.7% in Q1 2008 to the lowest level in almost three years, estimates by Zillow.com showed. The decline is the biggest in 12 years of data compiled by Zillow.com.
  • Federal Reserve Chairman Ben S. Bernanke, seeking to end the worst housing slump in a quarter century, urged the government and mortgage lenders to intensify their efforts to avoid home foreclosures.
  • Harvard University economist and Dating Committee member Martin Feldstein told Bloomberg News that the US economy is “sliding into a recession.” The economy is weakening, Feldstein said. “If you compare where the economy is now, with where it began at the beginning of the year, just about every indicator is down.” However, he added that it is too early to tell. “Everything hinges on what’s going to happen to house prices.”


  • Eurozone producer price inflation increased 0.7% m/m and rose a stronger-than-expected 5.7% y/y in March, the most since August 2006, after increasing 5.4% y/y in February, Eurostat reported.


  • The eurozone service PMI in April was upwardly revised to 52.0 from the provisional estimate of 51.8, compared with March’s 51.6. The improvement was mainly due to a strong German service sector, as Germany’s PMI rose to 54.9 in April from 51.8 in March. The French April service PMI was downwardly revised to 52.8 from a provisional 54.0, falling sharply from March’s 57.3 and reaching its lowest level since August 2003. The Italian and Spanish service indexes rose but remained below 50, indicating contraction. Italy’s service PMI rose to 49.8 in April from 48.8 in March, while the Spanish reading increased to 42.5 from 40.9.


  • The UK service PMI fell to a lower-than-expected 50.4 in April, the lowest since March 2003, from 52.1 in March, the Chartered Institute of Purchasing and Supply said. Both the manufacturing and service indexes have been falling steadily, indicating the UK economy is at a stall speed.



  • Australia’s trade deficit narrowed more than expected to A$2.74 billion in March from a record A$3.26 billion in February, the Bureau of Statistics said. Exports rose 4% m/m to A$19.2 billion in March, on strong iron ore, coal and wheat export. Imports increased 1% m/m to A$21.9 billion.
  • The Reserve Bank of Australia, as forecast, left the overnight cash rate target unchanged for a second month, at a 12-year high of 7.25%, saying there is mounting evidence the highest borrowing costs in 12 years will slow the Australian economy enough to cool inflation. “Evidence is accumulating” that growth in demand will slow this year, RBA Governor Glenn Stevens said, adding that “[i]n the short term, inflation is likely to remain relatively high, but it should decline over time provided demand evolves as expected.”

FX Strategy Update