Long-awaited correction.
• Swiss franc slightly depreciated against British pound. GBP/CHF edged up to 2.03. The targets remain unchanged. Medium term targets for this currency pair are 2.127 and 2.151.
• Market participants’ optimism increased. As a result, EUR/CHF soared to 1.578. Short and medium term targets for EUR/CHF currency pair are 1.597 and 1.611, accordingly.
• I think that a further appreciation of Japanese yen is very unlikely. Furthermore, there is a high possibility of coordinated intervention by major central banks. In this context I issue targets for USD/JPY at 105.7 and 107.7 for short and medium term strategies, accordingly.
• Japanese yen significantly depreciated against British pound. In particular, GBP/JPY rose to 201.7 last week. I focus on 207.7, which is the minimal correction level of the last three months downtrend.
• Tightening bias of Reserve Bank Australia is still supporting Australian dollar. The latter fluctuated in a tight range against Japanese yen.


US - Existing Home Sales (released - Mar 24)
Existing home sales rise on falling price.
The US existing home sales rose by 2.9% in February to 5.03mln annualized units, which has been the first increase since last year February. Nevertheless they plunged by 23.8% from the February 2007.
In February single-family sales soared for the second consecutive month. They rose by 2.8% over month. At the same time multifamily sales edged up by 3.7% m/m. However, single-family home sales slumped by 22.9% over year, which has been the lowest rate since July 1982.
Existing home sales fell in all regions. The worst performer is the Midwest region where sales declined by 3.1% on a monthly basis. It favored 7.1% y/y slippage of the sales in this region. Home sales dropped down by 2% m/m and 1.4% m/m in the West and Northeast, accordingly.
In February inventory levels slightly adjusted, as the months’ supply of all existing homes sank to 9.6 from 10.2 in a prior month. The months’ supply of single-family homes tumbled to 9.2, while this index edged up by 1.2 points to 13 and hit new cycle high.
The mean sales price of existing homes has been 7% lower in February compared with the same period of 2007. Single family homes prices dropped by 7.5% over year, after falling 5.2% in January. Despite the crisis in the real estate market multifamily prices fell less than the latter (2.7% y/y).

US - Durable Goods (released - Mar 26)
Durable orders contracted for second consecutive month.
In February new orders for manufactured durable goods tumbled down by 1.7% m/m, after a 4.7% reduction in January. Moreover, excluding transportation sub index, which is the most volatile component, durable goods orders edged down by 2.6%. It came out of transportation orders, which rose by 0.6% to 62.1bln dollars. The demand for both defense and civilian aircrafts and parts increased among the components of transportation sub index. New orders for civilian aircrafts rose by 5.4%, as Boeing Company received 125 orders compared with 65 in prior month. Computers and communication equipment became another source of the growth, the orders of which were 10% and 6% more than in January. The positive impact of the above mentioned components of this macroeconomic indicator was partially offset by 13.3% and 2.7% increase of machinery and motor vehicles orders, accordingly. As a result, durable goods new orders increased by 4.2% over year.

Japan - Prices (released - Mar 27)
Surging energy and food prices pushed up inflation.
In February Japan consumer prices index fell by 0.2% on a monthly basis, which accelerated inflation at 1% during the last twelve months. Upward pressure came largely from increases in utility and transportation services, fuel and food prices. Fresh food rose in price by 1.4% over year, thanks to increased prices of fresh vegetables. All other food prices showed a notable gain mainly due to bakery products. As 0.8% m/m decrease was stated in February of last year, food prices rose by 1.2% over year.
Record high oil prices pushed up all kinds of energy carrier prices. Utility index remains unchanged on a monthly basis, following a 0.8% gain in prior month. As a result this index accelerated to 4% y/y. It was the result of soared fuel and natural gas prices. Hereupon transportation and communication services prices edged up.
The positive impact on inflation from the above mentioned goods and services prices increase or moderated downward trend was partly offset by a slippage of clothing, recreational and medical services prices. Clothing and footwear became cheaper by 2.5% in February compared to January. This reduction was well above the prior level (February 2007) which in its turn favored the negative impact of clothing on the inflation. Moreover, in Tokyo their prices growth rate reduced in March, which will be included in nationwide prices next month.
In February consumer prices index, excluding food, alcoholic beverages and fuel prices, demonstrated 0.1% decrease over year. The dynamics of this index has remained descending since August of 1998.

Fed actions are becoming more and more aggressive!
• Swiss franc is strengthening against British pound for the fourth consecutive week. GBP/CHF tumbled down to 1.94, which has been the lowest rate since 1995. It has been the biggest decline since British pound devaluation in 1992. The targets have been lowered again. Medium term targets for this currency pair are 2.127 and 2.151.
• Swiss franc was in strong demand in the context of the crisis in the US real estate market and geopolitical developments. Fed aggressive action had an additional upward pressure on franc. As a result, EUR/CHF sharply fell to 1.5343, which has been the lowest level since June 2005. Short and medium term targets for EUR/CHF currency pair are 1.597 and 1.611, accordingly.
• USD/JPY tumbled down to 95.77, which has been the lowest level since 1995. I think that a further appreciation of Japanese yen is very unlikely. Furthermore, there is a high possibility of coordinated intervention by major central banks. In this context I issue targets for USD/JPY at 105.7 and 107.7 for short and medium term strategies, accordingly.
• Japanese yen significantly appreciated against British pound second week in a row. In particular, GBP/JPY dropped down to 192.6 last week. I focus on 207.7, which is the minimal correction level of the last three months downtrend.
• Tightening bias of Reserve Bank Australia is still supporting Australian dollar. Nevertheless, it depreciated against Japanese yen. Due to this devaluation my long recommendation has been executed (91).


US - FOMC (released – Mar 18)

Fed actions are becoming more and more aggressive.

The Federal Open Market Committee lowered its target for the federal funds rate by 75 basis points to 2.25%.
In the published statement the Committee members commented on the cut of key interest rates in the following way: “Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters. Today’s policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain”. At the end of the press-release they added again that they will continue assessing the effects of these and other developments on the economic prospects and will take the needed measures to foster price stability and sustainable economic growth.

In regard to prices FOMC members opinions changed slightly “Inflation has been elevated, and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully”. Of no small importance is the fact that two of the Committee members voted against, preferring a less aggressive cut.

Committee members decided to cut federal funds rates for the sixth consecutive time. Aggressive actions of the Fed were caused by the crisis in the US real estate market, tightened credit conditions for the private sector, huge losses of investment banks and sell-off in stock market. In the context of these developments two year Treasury bond yield dropped down to 1.35%, which has been the lowest level since June 2003.

The tension on financial market remains high following the unwillingness of the banks to lend each other and “freeze” bonds market, backed by Subprime and Alt-A mortgages. Since the companies, providing such loans, are unable to finance their liabilities through fixed income market, there is still a cash deficit and discredit towards each other in the financial market. Five leading central banks realized coordinated intervention and provided liquidity for 28 days to satisfy the demand for short term liquidity. For that the Fed lent 36bln USD to the European Central Bank (30bln) and Swiss National Bank (6bln). This loan was meant for satisfying the needs of European banks in USD. BOC and BOE intervened without the assistance of FED. Moreover, the Fed lent 200bln of Treasury securities to primary dealers for 28 days by a pledge of mortgage backed securities. As Treasuries have highest liquidity it will give banks an opportunity to borrow by low rates.

Serious problems of Bear Stearns forced the Fed to reduce discount rate by 25 basis points on unscheduled meeting on March 16. The Committee members had an unscheduled meeting on a day off three decades ago.

These developments confirmed my opinion to the effect that the negative impact of credit crunch on economy will be significant, as long as the rise of real estate prices has been the main driver of the US economic growth in the last years. According to some estimations the fall in housing prices by one dollar reduces personal expenditure from 7 to 8 cents. Moreover, there are the first signs of the ending of the four year rapid employment growth cycle. According to the published data wage growth is significantly reducing, whereas unemployment rate remains at low level. Abrupt reduction of fixed investments has left a mark on real estate market and construction, in the form of downsizing workplaces, mortgage companies’ bankruptcy and negative sentiment regarding the perspectives of this sector’s further growth. Huge losses of investment banks “collapsed” the US stock market, the capitalization increase of the latter along with real estate market had a significant negative impact on the economic growth.

On the basis of these arguments I adduce an opinion that the reduction of federal funds rates will depend on two opposite factors: on the one hand these are oil, metal and wheat prices, and on the other hand - real estate market and personal expenditure data. I also assume that if the crisis in the real estate market negatively impacts growth pace of personal expenditure, Committee members will most likely have to shut their eyes to inflation and cut interest rates for providing inexpensive liquidity to the market. Since the condition of the economy has been worsening day by day, the Fed started to stimulate the economic growth. In this connection, I think, that federal funds rates will be lowered by another 25 or 50 basis points. Only the dynamics of commodity may mitigate the current pace of interest rates easing policy.

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