We believe that in light of the recent economic data the FOMC will cut rates by 25bp to 5.00% and, perhaps, lower their discount rate by another 50bp. It is important to the Fed’s President, Bernanke, that any cut in federal fund rates should be viewed as a smart macroeconomic move and not as a pressured response to the current financial turmoil hitting Wall Street. There is clear evidence that the US economic condition is softening at a rapid pace. However, this is not happening to the extent that the recent disastrous US payroll figures and the subsequent market reaction would have you believe. Softer than expected readings in the consumer sector, specifically in retail sales and in the fall of factory output last week, are critical indicators that highlight strains in the economy that were simmering prior to the recent financial commotion affecting the markets today. The growing downside risks call for a loosening of monetary policy. All this inclines us to think that the Fed will indeed ease their rates on Tuesday. It is highly probable that the Fed will look to cut rates even further but this will depend on what future data indicates. We have always believed that the BoJ would be on hold through 2007. Given the current economic and political environment they have every reason to hold rates at 0.50%. Moreover, given Japan’s current glum economic situation (when compared with its performance in the first half of the year), Prime Minister Abe's sudden resignation, together with the global financial turmoil pressuring the Fed to cut its rate a day earlier, makes further “normalizing” by the BoJ difficult. We still see weakness in the Japanese economy. We also think the decoupling of the US/Japanese economies to be garish. Therefore, we would have to see a strong resurgence of carry trades and a rally in Japan’s prospects to see any activity by the BoJ this year. Given Mexico’s slowing inflation rate and worries over exposure to the US slowdown, we think that the Banxico will hold rates at 7.25% on Thursday meeting. Governor Ortiz had previously highlighted pressures on inflation but readings for August CPI core at .21% MoM and headline at .41% MoM showed a continued decline. This has given Central Bank more time to reflect on a further tightening. In addition, the compromise of phasing in a recently passed fiscal reform package, which included a tax on gasoline rather than a one-time adjustment, will ease the Central banks immediate inflation concerns. Following the decision in August to hold rates steady economic data continued to support forecasts of an easing inflation rate falling below the 3% target rate for 2008. The bank will still maintain on a “restrictive bias” keeping the door open for additional tightening. ACM Advanced Currency Markets SA (hereinafter referred as ACM) is a professional financial intermediary, directly regulated by the Swiss Federal Department of Finance, Anti Money Laundering Control Authority. As forex specialist, ACM provides only currency and precious metals trading via highly professional forex trading software. All customers are aware that this information or any part thereof has been prepared without taking account of your objectives, financial situation and/or needs. This information is not intended as personalized investment advice and does not constitute a recommendation. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. The analysis is based on the information which ACM finds reliable and accurate, but ACM does not assume any responsibility for any material nor for the transactions made on the basis of the information or the estimates of the analysis. ACM cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct, indirect and/or consequential loss arising from any use of this information, document or its content. All opinions and estimates constitute ACM analysis as of the data and are subject to change without notice. ACM does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions. Past performance is not a reliable indicator of future performance.
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