· The dollar fell versus the yen but rose against other key currencies Wednesday. Risk aversion increased on speculation international rescue efforts to shore up financial institutions will not prevent the global economy from a serious economic contraction. Federal Reserve Chairman Ben S. Bernanke said despite the government’s efforts to calm financial markets and stem the credit crisis, “broader economic recovery will not happen right away.” The euro and sterling declined. The Australian and Canadian dollars fell as commodity prices retreated on the gloomier economic outlook. The yen rose on carry-trade unwinding as US stocks had another huge drop.

· The GBP/USD fell today but is higher for the week. The pair has recovered some of the last two months’ heavy losses. However, this may be a pause in a longer term decline. There are resistance in the 1.77-area and support in the 1.70. We sell the pair with stop at 1.7940.

Financial and Economic News and Comments

US & Canada

· Federal Reserve Chairman Ben S. Bernanke said government efforts to calm financial markets and stem the credit crisis probably will not result in an immediate economic recovery. “Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away,” Bernanke said at the Economic Club of New York. He kept the door open to further interest-rate cuts, saying economic activity will fall short of potential for a time.

· US economic activity weakened across all 12 Fed districts, according to the latest Fed beige book. Most of the Fed’s 12 regional banks reported that manufacturing has slowed and consumer spending has decreased. Households and businesses are also facing tighter credit conditions. “Credit conditions were characterized as being tight across the 12 districts, with several reporting reduced credit availability for both financial and non-financial institutions,” the beige book stated.

· The US producer-price index fell 0.4% m/m in September, exactly as the consensus expected. The PPI rose 8.7% y/y. The month-on-month decline was due to energy, which fell 2.9% m/m in September. The core PPI rose 0.4% m/m and 4.0% y/y in September. The PPI will likely continue to decline as energy prices are falling and economic activity slowing.
 

· US retail sales declined a stronger-than-expected 1.2% m/m in September, the sharpest drop in three years, data from the Commerce Department showed. Retail sales fell 1.0% y/y. Retail sales excluding autos fell a more-than-expected 0.6% m/m but rose 3.6% y/y. Overall, retail sales will likely become weaker in the coming months.

· The NY Fed manufacturing index plunged to -24.6 in October, the lowest level since the index inception in 2001, from -7.4 in September, the Federal Reserve Bank of New York reported. This is another indication that the US economy is in a recession.

· US business inventories rose a slightly less-than-expected 0.3% m/m in August, the Commerce Department said.

· Canadian existing home sales rose 3.0% m/m to 25,680 units in September before new rules, the Canadian Real Estate Association said. The average resale price fell to C$315,461 ($269,601), down 6.2% y/y. According to the new rules imposed by the federal finance department in July, government mortgage-insurance is only available for mortgages with a term of 35 years or less and for people making a minimum down payment of 5% of the home value.

Europe

· The eurozone consumer-price inflation rate decelerated to 3.6% y/y in September from 3.8% y/y in August, while the core CPI rate decreased to 2.5% y/y from August’s 2.6% y/y, Eurostat reported.

· Germany’s CPI rose 2.9% y/y and fell 0.1% m/m in September, in line with expectations, data from the Federal Statistical Office showed. In EU harmonized terms, the CPI rose 3.0% y/y and fell 0.1% m/m in September.

· UK jobless claims rose 31,800 to 939,900 in September, the highest since November 2006, the Office for National Statistics said. The increase for August was 35,700, the most since 1992. The unemployment rate in the three months through August rose to 5.7%, the most since 2000, up from the 5.5% level seen in the three months to July. The number of unemployed people climbed 164,000 from the previous three months, the largest increase since the early 1990s.

· The European Central Bank announced measures aimed at expanding collateral and enhancing liquidity measures. The ECB said it would expand the list of assets that could be used as collateral in Eurosystem credit operations.

Asia-Pacific

· In August, Japan posted a ¥236 billion ($2.3 billion) trade deficit from a year earlier on a balance-of-payments basis, the largest deficit since the release of comparable data in 1985, the Ministry of Finance said. Imports rose 20.2% y/y in August, after surging to a record in July. Exports increased 0.9% y/y. The current-account surplus shrank 52.5% y/y to ¥988.8 billion.

· Australia’s Westpac leading economic index declined 0.1% m/m to 259.2 in August, signaling the Australian economic expansion will slow further, Westpac Banking Corp. and the Melbourne Institute reported. The LEI slowed to 2.5% y/y in August from 3.3% y/y in July.

· Japan’s government nominated Hirohide Yamaguchi for Bank of Japan Deputy Governor. Yamaguchi is one of the six BOJ executive directors. Both houses of parliament are scheduled to question Yamaguchi on October 21 and vote on his appointment on October 24. If approved, he will join Kiyohiko Nishimura as one of the BOJ’s two deputies.