Daily Market Review 06/08/2008

Fed perhaps on the dovish side of expectations, but market sees little response to new Fed wording. Focus shifts to tomorrow's ECB and BOE meetings.

US ISM Non-manufacturing a tad stronger than expected. Latest Australian and New Zealand employment reports up tonight.

MAJOR HEADLINES – PREVIOUS SESSION US Jul. ISM Non-manufacturing out at 49.5 vs. 48.8 expected US FOMC left interest rates unchanged at 2.00% as expected US Weekly ABC Consumer Confidence dropped to -49 from -47 the previous week UK Jul. NIESR GDP Estimate at 0.1% vs. 0.2% in Jun. UK Jul. Nationwide Consumer Confidence fell to 51 vs. 57 expected Australia Jun. Home Loans out at -3.7% vs. -2.0% in May.

THEMES TO WATCH – UPCOMING SESSION Key Risk Events (All times in GMT) UK Jul. BRC Shop Price Index (0930) Germany Jun. Factory Orders (1000) Canada Jul. Ivey PMI (1400) US Weekly Crude Oil and Product Inventories (1435) New Zealand Q2 Unemployment Rate and Employment Change (2245) Australia Jul. AiG Performance of Construction Index (2330) Japan Jun. Machine Orders (2350) Australia Jul. Employment Change and Unemployment Rate (0130)

Market Comments No big surprises from the Fed last night, though the statement was perhaps on the dovish side of expectations, as the Fed removed language that suggested they saw downside risks to growth diminishing and highlighted the long list of risks to the economy going forward. Short term interest rates dropped very slightly on the move and the meeting seemed to provide a temporary ceiling for the USD, though USDJPY is looking like it wants to break higher again this morning. It's a bit surprising that odds for a 25-bp Fed hike by December are still rather high (well above 50%) as the Fed should be far more comfortable with its past decisions to keep rates steady and continuing to keep a stable outlook with the key inputs in this cost-push inflation environment rapidly retreating. Oil is now 20% off its highest levels and basic foodstuffs are down 25% or more. Even if commodities stabilize and quit dropping for now, the headline inflation numbers will begin to come off heavily in months ahead as we look at an increasingly weak demand environment and declining real wages as we;;. The first key resistance levels for EURUSD are 1.5516 - the previous low from Aug 1, 1.5560, the 0.618 retracement of the latest downmove, and the 10-day moving average in the 1.5600 area. A strong reversal higher today could possible set up a bout of range trading, though tomorrow's ECB meeting is a significant event risk to say the least and could trump any technical developments. More on the ECB in tomorrow morning's report. It seems that the low yielders are awfully choosy about the conditions necessary for a rally, as the huge commodity sell-off has only generated a few intermittent bouts of strength in the JPY. Yesterday's further drop in oil was unable to come to the aid of the JPY as the focus was apparently on the positive equity market reaction to rather dovish guidance from the Fed. If the mood remains positive in risk appetite, it appears the carry trades will remain rangebound for now and avoid the downside once again, though we still think rallies will be capped in those trades. Key employment reports tonight from down under, with the quarterly New Zealand employment survey likely to show a surge in the unemployment rate after years of bumping along at 20-year lows below 4.0% (the Q1 rate was 3.6%). The rate is likely to end the year closer to 4.5% as the gathering clouds of economic ills to come for this economy are felt in this lagging indicator. The same goes for Australia, where July data is likely to help confirm that we saw a cyclical low in the Australian unemployment rate earlier this year that marks the end of a remarkable 16-year fall from over 10% to just under 4.0%. A key day for energy/commodity markets with the latest inventory data from the US. It would be nice at some point to get a clearer read on the commodity market independent of the USD movements to help prove that the bull market in commodities is weakening on its own accord. Such a development could trigger further weakness in the commodity currencies and eventually strengthen the low-yielders. Equity markets are a bit euphoric about the lesser threat of central bank tightening and the fall in commodities that have generated so many cost pressures for companies, but may eventually fall again as the reason for the fall in these - plummeting demand growth - require caution on forward earnings projections. Again, the hat-trick of falling commodities, yields, AND equities seems to be necessary for giving any JPY and CHF rally the appropriate credentials.

FX

EUR USD JPY GBP CHF AUD CAD NZD NOK SEK PLN 0 0 - 0 0 0 0 0 0 0 +

FX Trading Strategies

Pair Supp. Resis. Comments USDJPY 107.40 108.61 We continue to look for the same technical break-out on the upside and continue with our working order to buy 108.62 bid. Stop loss at 108.38 offered and targeting 109.70 area.

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