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2 September 2010
Hedge funds made EUR/CHF fall

Strategists at UBS note that the decline of EUR/CHF may have happened because of the hedge funds activity. UBS specialists claim that if hedge funds had taken profit and quitted EUR/CHF market, franc’s strengthening may have stopped and the pair could have chance to visit 1.35-1.40 area.

However, bank notes that US economic growth pace is increasing too slowly and investors’ risk aversion keeps being high. All these factors may pull EUR/CHF down to 1.25 and even below the parity, claims UBS.

Strategists at UBS note that the decline of EUR/CHF may have happened because of the hedge funds activity.

2 September 2010
Dollar Outlook Stalled by Aimless Risk Trends, Fed’s Concerns

Be sure to join DailyFX Analysts in discussing their outlook for the Fed and its impact on the dollar in the DailyFX Forex Forum

Credit Market	Previous	Current	Change	% Change	Outlook *
DJ Credit Default Swaps	112.998	114.450	1.453	1.29%	Deteriorating
10 Year Junk-Bond Spread	660.09	651.31	-8.78	-1.33%	Improving
Credit Card Delinquencies	4.77	4.64	-0.13	-0.13%	Improving
Mortgage Delinquencies	10.06	9.85	-0.21	-0.21%	Improving
US 3 Month Libor Rate	0.308	0.296	-0.01187	-3.86%	Deteriorating
Total Money Market Funds	2797.93	2833.65	35.72	1.28%	Deteriorating

Stock Market	Last Week	Current	Change	% Change	Outlook
Dow Jones Industrial Average	10060.06	10250.4	190.34	1.89%	Improving
Dow Jones Real Estate Index	195.34	202.96	7.62	3.90%	Improving
Dow Jones Financial Index	311.74	316.05	4.31	1.38%	Improving
Dow Jones Retail Index	80.8	83.99	3.19	3.95%	Improving
S&P Volatility	26.7	24.31	-2.39	-2.39%	Improving
Put-Call Ratio	0.87	1.82	0.95	0.95%	Deteriorating
Market Breadth (Adv - Dec)	0.4183	0.5157	0.0974	9.74%	Improving

Economic Indicators	Previous	Current	Change	% Change	Outlook
GDP (Annualized)	2.8	1.6	1.6	1.60%	Improving
Mortgage Applications	4.9	2.7	2.7	2.70%	Improving
Initial Jobless Claims	468	473	5	1.07%	Deteriorating
Consumer Confidence (UMich)	74	67.8	-6.2	-8.38%	Deteriorating
ISM Manufacturing	55.5	56.3	0.8	1.44%	Deteriorating
ISM Services	53.8	54.3	0.5	0.93%	Deteriorating
ISM Services - Employment	49.7	50.9	1.2	2.41%	Deteriorating

An Improving outlook means the Federal Reserve could use this indicator

to support a rate hike. The opposite stands for a deteriorating outlook.

The Economy and the Credit Market

It is always good to step back from the day-to-day changes in the markets to put price action into context. While this past week has seen a number of instances of volatility expansion for the US dollar, the currency has actually strayed little from a general state of congestion. The same assessment can be applied to other capital markets; and from this unique correlation, it less of a stretch to suggest that the optimism that underlies the global financial markets is still responsible for the greenback’s future. That being said, US fundamentals developments have a leveraged influence on sentiment and even the dollar’s place on the risk spectrum. Of particular interest this past week were the revisions to the US 2Q GDP reading and the minutes of the Federal Reserve’s August monetary policy meeting. The deflation in the initial economic performance report bolstered the threat of a stalled recovery – so much so that there is a growing argument that the government is preparing a second stimulus initiative before the first round has been removed. The Fed’s statement similar fed speculative concerns over the future health of the economy with lowered second half growth projections; but there was also a long-term burden set upon the currency’s safe haven status as the central bank reflected on their decision to curb the withdrawal of monetary support and consider further expansion – a move that would devalue the dollar long term. Looking ahead, we are simply awaiting the next catalyst for risk appetite because that is the most volatile ingredient.

Dollar_Outlook_Stalled_by_Aimless_Risk_Trends_Feds_Concerns_body_Picture_1.png, Dollar Outlook Stalled by Aimless Risk Trends, Fed’s Concerns

A Closer Look at Financial and Consumer Conditions

Dollar_Outlook_Stalled_by_Aimless_Risk_Trends_Feds_Concerns_body_Picture_7.png, Dollar Outlook Stalled by Aimless Risk Trends, Fed’s Concerns

The Federal Reserve’s move to prop up the markets by purchasing Treasuries could be construed as a safety net that will stabilize the capital markets – and why not considering it worked the first time around. However, the extension of additional stimulus and the policy group’s hints that further expansion is a viable option is actually a sign that conditions are deteriorating and that such methods were ineffective the first time around. That being said, speculators will be comforted by what they will as long as capital returns are possible. As the market as a whole looks for a catalyst to define an undisputable trend of risk position building or unwinding, pricing will be kept on hold. A vigil should be kept on Europe, China and US financial health.

Dollar_Outlook_Stalled_by_Aimless_Risk_Trends_Feds_Concerns_body_Picture_10.png, Dollar Outlook Stalled by Aimless Risk Trends, Fed’s Concerns

It is difficult to argue that the economy is stabilizing or improving given last week’s data. First, the second quarter GDP revision brought a significant slowing in activity levels from the first three months of the year; and the breakdown of the details suggest there is little opportunity for a quick or meaningful reversal through the second half of the year. To ensure that this cannot be misinterpreted, the Fed explicitly stated its outlook for the second half of the year was lowered and that negative risks had increased substantially. Nonetheless, it seems the masses are placated by the fact that the GDP reading was better than its forecast, policy officials’ willingness to support the economy and even a standalone performance from manufacturing. We will see if reality dawns with Friday’s NFPs release.

The Financial and Capital Markets

Risk appetite has oscillated widely over the past week; and price action has responded in kind. However, this back and forth has actually prevented a clear development in price and speculative trend for one direction or the other. The scheduled data that was available for interpretation has been largely disappointing; which would leverage selling pressure if risk aversion were the dominant force in the market. Instead, the masses are hesitant to bite the bullet and unload their positions. Part of this ill-developed stability can be attributed to the existence of heavy event risk ahead. The US non-farm payroll report due on Friday carries enough of a threat for volatility that traders will avoid making major changes to their portfolio unless forced to. Another intervening force in this equation is the hope derived from the promise of a rising wave of stimulus. The Fed has joined the ECB, BoE and BoJ in extending the safety net underneath the market much like they did in 2008. The possibility of easy money is enticing when significant returns are hard to come by outside of capital gains. Will this leverage actually hold over investors’ confidence? Unlikely. But timing is just as important a factor in trading as direction.

Dollar_Outlook_Stalled_by_Aimless_Risk_Trends_Feds_Concerns_body_Picture_4.png, Dollar Outlook Stalled by Aimless Risk Trends, Fed’s Concerns

A Closer Look at Market Conditions

Dollar_Outlook_Stalled_by_Aimless_Risk_Trends_Feds_Concerns_body_Picture_16.png, Dollar Outlook Stalled by Aimless Risk Trends, Fed’s Concerns

The swings in the benchmarks of the capital market this week have been significant; but through it all, we have seen a general bear trend develop over the past month. However, our concern should not be direction – as it has been otherwise restrained to congestion – and instead focus on the intensified correlation between the different assets. We see here the step by step moves that equities and commodities make together. Such a significant relationship suggests there is a common concern within the speculative crowd. Furthermore, the intensity of the link is remarkable given the lack of overall trend. This in itself could be a sign of a forthcoming trend.

Dollar_Outlook_Stalled_by_Aimless_Risk_Trends_Feds_Concerns_body_Picture_13.png, Dollar Outlook Stalled by Aimless Risk Trends, Fed’s Concerns

Yet another week goes by where the traditional measures of risk are underpricing the level of uncertainty that exists for the future. We see that the increased frequency of swings in spot markets has increased volatility readings; but as sources of premium for uncertainty, these measures are proving themselves to be more definitively backwards looking (to a period where price action has not strained from a band – whether it be horizontal or come with a bias). However, from measures like Libor spreads, the Treasury yield curve, the TED spread (the difference between market and Treasury rates), default premiums, liquidity measures, stimulus expansion and other structural signs; it is clear that conditions are deteriorating.

It is always good to step back from the day-to-day changes in the markets to put price action into context...

2 September 2010
Slovakia Confirms Slower Growth In Q2

Slovakia's economy grew slightly better than estimated earlier during the second quarter, but the pace of growth slowed from the previous three months, official data showed Thursday.

Gross domestic product grew an unadjusted 4.7% year-on-year at constant prices during the second quarter, the Statistical Office of the Slovak Republic said. It was slightly faster than the 4.6% estimated initially. In the first quarter, the economy grew for the first time since the final three months of 2008, with an expansion of 4.8%.

At current prices, GDP rose 4.9% from last year compared with 2.8% growth in the first quarter. For the first half of the year, economic growth was 4.7% at constant prices and 3.9% at current prices.

Gross capital formation surged 21.4% year-on-year, while gross fixed capital formation declined 1.9%. Exports rose 16.5%, while imports increased 14.4%. Domestic demand grew by 3.5%. Household consumption declined 1%.

Labor productivity growth was 6.8 % at constant prices during the second quarter. Total employment decreased 2.3 % to 2.14 million. The number of employees dropped 3.1% to 1.81 million.

In June, the Slovak central bank raised the economic forecast for this year. The economy is expected to expand 3.7% in 2010, better than the earlier estimate of 3.2%. For 2011, the central bank projects 4.3% growth, down from 4.4%. Meanwhile, the growth forecast for 2012 was upwardly revised to 4.4% from 4.2%.

Slovakia's economy grew slightly better than estimated earlier during the second quarter, but the pace of growth slowed from the previous three months, official data showed Thursday...

2 September 2010
Euro Pares Gains Ahead of ECB Rate Decision, Euro Zone GDP Report

The Euro inched lower in Asian trade and cues from risk sentiment pointing to further weakness, with a rate decision from the European Central Bank and the release of revised Euro Zone GDP figures likely to amount to non-events.

Key Overnight Developments

Australian Trade Surplus Shrinks as Coal, Iron Ore Lead Exports Lower
Euro, Pound Decline as Risky-Linked Currencies Digest NY-Session Gains

Critical Levels

CCY	SUPPORT	RESISTANCE
EURUSD	1.2703	1.2863
GBPUSD	1.5349	1.5503

The Euro and the British Pound inched lower in overnight trade, shedding 0.1 percent against the US Dollar as currency markets digested the upswing in risk appetite in New York hours. We remain short EURUSD and flat GBPUSD.

Asia Session Highlights

CCY	GMT	EVENT	ACT	EXP	PREV
JPY	23:50	Monetary Base (YoY) (AUG)	5.4%	-	6.1%
AUD	1:30	Trade Balance (Australian dollar) (JUL)	1888M	3100M	3438M (R-)

Australia’s Trade Balance surplus narrowed for the first in three months in July, printing at A$1.8 billion. Economists were expecting a shallower decline to A$3.1 billion ahead of the release. Exports slumped 4.6 percent, with shipments to China – Australia’s top trading partner and the top source of demand behind the mining boom that kept the antipodean economy afloat amid the so-called Great Recession – falling 7.9 percent to post the first decline in six months. More worrying still, overseas sales of coal and metal ore led exports lower, down 16 percent and 7 percent respectively.

On balance, the outcome reinforces fears that despite impressive performance in the second quarter, the economy faces strong headwinds in the second half of the year amid broad-based cooling in global demand, keeping the RBA firmly on the sidelines. Indeed, a Credit Suisse gauge of priced-in monetary policy expectations shows traders are betting on no further rate hikes over the coming year, seemingly robbing the Australian Dollar of an impetus for a sustained advance.

Euro Session: What to Expect

CCY	GMT	EVENT	EXP	PREV	IMPACT
EUR	5:30	French Mainland Unemployment Change (2Q)	-	4K	Low
EUR	5:30	French ILO Mainland Unemployment Rate (2Q)	9.6%	9.5%	Low
EUR	5:30	French ILO Unemployment Rate (2Q)	10.0%	9.9%	Low
CHF	5:45	Gross Domestic Product (QoQ) (2Q)	0.8%	1.0%	High
CHF	5:45	Gross Domestic Product (YoY) (2Q)	2.6%	2.3%	High
GBP	6:00	Nationwide House Prices s.a. (MoM) (AUG)	-0.3%	-0.5%	Medium
GBP	6:00	Nationwide House Prices n.s.a. (YoY) (AUG)	4.9%	6.6%	Medium
CHF	7:15	Retail Sales (Real) (YoY) (JUL)	-	1.0%	Medium
EUR	8:00	Italian Producer Price Index (YoY) (JUL)	4.3%	3.5%	Low
EUR	8:00	Italian Producer Price Index (MoM) (JUL)	0.4%	0.2%	Low
GBP	8:30	Purchasing Manager Index Construction (AUG)	53.2	54.1	Low
EUR	9:00	Euro-Zone Gross Domestic Product s.a. (QoQ) (2Q P)	1.0%	1.0%	High
EUR	9:00	Euro-Zone Gross Domestic Product s.a. (YoY) (2Q P)	1.7%	1.7%	High
EUR	9:00	Euro-Zone Gross Fixed Capital Formation (QoQ) (2Q P)	-	-1.2%	Medium
EUR	9:00	Euro-Zone Household Consumption (QoQ) (2Q P)	0.2%	-0.1%	Medium
EUR	9:00	Euro-Zone Government Expenditure (QoQ) (2Q P)	-	0.2%	Low
EUR	9:00	Euro-Zone Producer Price Index (MoM) (JUL)	0.3%	0.3%	Low
EUR	9:00	Euro-Zone Producer Price Index (YoY) (JUL)	4.0%	3.0%	Low
EUR	11:45	European Central Bank Interest Rate Decision (SEP 2)	1.0%	1.0%	High

A busy economic calendar awaits currency markets in European hours. A revision of second-quarter Euro Zone Gross Domestic Product figures is expected to confirm the economy added 1 percent in the three months through June. Traders are likely to look past the headline figure whoever to focus on the components of economic growth to gauge the economy’s ability to remain afloat as the region turns to austerity and bond issuance – both of them growth-negative – to finance its gaping public deficits.

Switzerland’s Gross Domestic Product figures are set to show output to added 0.8 percent in the second quarter, pushing the annual growth rate to 2.6 percent, the highest in two years. However, Switzerland’s reliance on exports necessarily suggests it lags importers in the global business cycle as its own rebound must wait for a recovery in overseas demand. While this means that Switzerland may appear resilient as other nations falter on the way into a slowdown, it equally looks weaker than others on the way to recovery. Therefore, the Swiss GDP result is likely to be sized up in the context of the Euro Zone outcome considering the mountain nation relies on the currency bloc for over 60 percent of its export demand, firmly tying its fate to that of the common market.

The monetary policy announcement from the European Central Bank may prove to be another non-event. As we discussed earlier in the week, the wide disparity in expected economic performance within the currency bloc over the coming years makes setting a single monetary policy difficult to say the least. Indeed, while German growth is expected to outperform the regional average by over a percentage point on average through 2011, growth in relatively large member states like Italy and Spain (to say nothing of Greece) is expect to underperform, making it all but impossible to set rates such as to both encourage growth and control inflation region-wide. Luckily for Jean-Claude Trichet and company, the ECB’s stated mandate is to ensure “price stability”. With the annual inflation rate at a manageable 1.6 percent – below the 2 percent target level but not so low as to threaten deflation – the temptation to adopt a wait-and-see approach by an already slow-moving ECB is surely overwhelming.

Turning to sentiment, S&P 500 stock index futures are down 0.4 percent in late Asian trade, hinting yesterday’s surge in risk appetite may have run out of steam and pointing toward gains for the safety-linked US Dollar and Japanese Yen.

2 September 2010
Daily Forecast

EUR/USD
Trading range: 1.2770 - 1.2870
Trend: Upward
Buy at 1.2782 SL 1.2750 TP 1.2859

USD/JPY
Trading range: 84.40 - 83.45
Trend: Downward
Sell at 84.26 87 84.58 TP 83.54

GBP/USD
Trading range: 1.5460 - 1.5350
Trend: Downward
Sell at 1.5450 SL 1.5482 TP 1.5362

USD/CHF
Trading range: 1.0195 - 1.0090
Trend: Downward
Sell at 1.0184 SL 1.0216 TP 1.0100

EUR/USD Trading range: 1.2770 - 1.2870; Trend: Upward; Buy at 1.2782 SL 1.2750 TP 1.2859

2 September 2010
Forex Overview

Previous session overview
The euro fell against the yen in Asia on Thursday on the view that European Central Bank President Jean-Claude Trichet may take a less hawkish line on monetary policy at an upcoming press conference.

During Asian trade, non-Japanese hedge funds were selling a solid amount of euros, pushing it down to JPY107.70 as of 0450 GMT, from JPY108.11 late Wednesday New York. The euro was also weaker against the dollar, at USD1.2791 from USD1.2800.

The yen, meanwhile, strengthened against the dollar, with the greenback falling to JPY84.19 from JPY84.47.

The ICE Dollar Index, which tracks the dollar against a trade-weighted basket of currencies, was at 82.530 from 82.510.

The British pound gained against the dollar, but weakened to a three-week low vs. the euro after a weaker than expected UK purchasing managers' survey.

The Australian dollar was higher late in Asia on Thursday on the back of better-than-expected U.S. manufacturing data, heading into an offshore session packed with event risk. At 0530 GMT, the Australian dollar was at USD0.9075, up from USD0.8993 late Wednesday. Against the Japanese yen, the Australian dollar was at JPY76.44, from JPY75.865.

Market expectation
Trichet will speak to the press at 1230 GMT Thursday, after the central bank discusses interest rates. Analysts believe the ECB will hold its key rate steady at 1.00%.

On the economic calendar, the purchasing managers' index for the U.K. construction sector is due at 0830 GMT, while euro-zone gross domestic product and producer price index figures are scheduled for 0900 GMT. The European Central Bank interest rate announcement is at 1145 GMT. In the U.S., initial jobless claims at 1230 GMT will be watched closely, while factory orders and pending home sales are due at 1400 GMT.

European stocks are expected to open lower Thursday, as investors look to take profits after the sharp gains of the previous session, amid caution ahead of Friday's U.S. nonfarm payrolls release.

USDCHF is holding above its 2-year support line of 1.0020, but if that's breached, there is downside potential to 1.0000 and then 0.9915.These levels represent critical junctures on the technical chart, and analysts expect them to hold the initial test, say technical analysts.

The Pound is little changed against the euro and dollar, and is likely to hold in narrow ranges against both while investors wait for the U.S. labor market report on Friday, traders report.

The euro fell against the yen in Asia on Thursday on the view that European Central Bank President Jean-Claude Trichet may take a less hawkish line on monetary policy at an upcoming press conference...

1 September 2010
Euro may keep growing only above 1.2710

The single currency jumped from the session’s minimum at 1.2625 to trade slightly below 1.2710. Such move stimulated bullish momentum for the pair.

According to the technical analysts, EUR/USD will be able to advance to 1.2750/70 zone only if it overcomes 20-day SMA at 1.2710. Otherwise, euro will return to the levels below 1.2660 and then to the daily minimum and 1.2580.

The single currency jumped from the session’s minimum at 1.2625 to trade slightly below 1.2710. Such move stimulated bullish momentum for the pair.

1 September 2010
Czech Manufacturing Growth Improves In August

Czech manufacturing sector expanded at a faster pace in August, owing to a sharp rise in new work.

The headline HSBC Czech Republic Manufacturing Purchasing Managers' Index or PMI rose to 57.3 from July's four-month low of 56.8, Markit economics said Wednesday. A PMI reading above 50 signals expansion in the sector. Manufacturing grew for the tenth consecutive month.

Growth in new work remained well-above the survey average, Markit said. The improvement was underpinned by both domestic and export markets, wherein Germany was the primary source of demand.

Production grew for the 13th month in a row and the rate of increase rose to the highest since August 2007. Yet, the volume of outstanding work rose further leading to eleventh month of backlog of accumulation. Manufacturers also increased head count during August due to filling order books and positive outlook for business growth. Employment grew for the sixth straight month.

Input price inflation, which remained comparatively sharp, eased for the third month in a row. Meanwhile, Czech manufacturers charged lower prices for the first time in four months in August. A number of firms commented that they had lowered their koruna-denominated prices in order to offset the continued strength of the currency and maintain international competitiveness, Markit said.

"The Czech recovery continues to mimic a better-than-expected revival in Western Europe, and the August PMI suggests the economy will maintain its sound footing in the third quarter," said Kubilay Ozturk, an economist at HSBC. "The Czech economy will probably be affected by an expected slowdown in the Eurozone's rebound in Q4 2010 and next year."

"But the favorable divergence of the German economy, to which the Czech production cycle is most closely linked, will likely provide some comfort," the economist said.

Czech economic growth accelerated in the second quarter, driven by a strong growth in manufacturing. Gross domestic product grew a seasonal and working day adjusted 2.2% year-on-year in the second quarter, faster than the 1.1% increase in the first quarter. On August 5, the Czech central bank lifted the growth forecast for this year to 1.6% from 1.4%.

In August, ratings agency Standard & Poor's upgraded its sovereign outlook on the Czech Republic to positive, reflecting a greater than one-in-three likelihood of a ratings upgrade over the next two years. The sovereign credit ratings are underpinned by the diversified and competitive economy and fiscal and monetary flexibility of the nation, the agency said.

Czech manufacturing sector expanded at a faster pace in August, owing to a sharp rise in new work...

1 September 2010
Forex Overview

Previous session overview
The yen gave up overnight gains against the dollar and euro in Asian trading Wednesday, as stronger regional share markets cut into demand for the safe-haven Japanese unit, which was also hit by statements from a highly influential politician favoring direct intervention by Japan.

But amid lingering concerns over the health of the global economy, the yen is unlikely to weaken sharply for the rest of the week, especially ahead of U.S. employment figures Friday, traders said.

Among Asian share markets, the Shanghai Composite was up 0.1% midday after data showed China's manufacturing sector rebounded in August, which may have slightly easing concerns over an economic slowdown ahead. Hong Kong's Hang Seng Index rose 0.4% and Taiwan's Taiex added 0.6%, while South Korea's Kospi Composite rose 1.3%.

At 0450 GMT, the dollar was at JPY84.37, up from JPY83.83 late Tuesday in New York. The euro traded hands at JPY107.17, up from JPY106.25.

The euro was at USD1.2700 at 0450 GMT from USD1.2673 late Tuesday in New York. Any further rises in the single unit would likely be capped at USD1.2750, due to an accumulation of selling orders at and below that level, dealers said.

The ICE Dollar Index, which tracks the greenback against a trade-weighted basket of currencies including the euro, was at 83.017 compared with 83.104.

The Pound is trading near a five-week low against the U.S. dollar on gloomy global growth outlook. This comes despite upbeat news that July U.K. mortgage approvals in July and consumer confidence in August exceeded expectations. The GBP fell because the market was looking for something more robust.

The Australian dollar surged in Asian trade after robust second quarter growth figures released Wednesday showed the domestic economy is firing on all cylinders, keeping alive the notion of further rate hikes by the central bank.

Market expectation
For the rest of the week, the dollar and euro may not gain more sharply against the yen as investors hesitate to make major bets before the U.S. August non-farm payrolls report Friday. Economists expect the report to show 110,000 jobs shed in the month, a slight improvement from the 131,000 lost in July. But they expect the unemployment rate to rise to 9.6% from 9.5%.

The British pound-U.S. dollar is likely to consolidate with a bearish bias after falling one penny yesterday on strong European month-end demand for the euro-pound cross, which could continue to gain.

EUR higher vs USD as Asian equities gain, reviving players' willingness to buy riskier assets. EURUSD could rise to USD1.2750 vs last USD1.2705, say analysts. But says fair accumulation of selling orders above USD1.2700 could slow any rise to USD1.2750. Says pair likely to stay in USD1.2600-USD1.2750 band for rest of week; direction thereafter to be determined by U.S. August non-farm payrolls data, due Friday, which, if worse-than-expected, could push pair higher.

The yen gave up overnight gains against the dollar and euro in Asian trading Wednesday, as stronger regional share markets cut into demand for the safe-haven Japanese unit...

1 September 2010
Daily Forecast

EUR/USD
Trading range: 1.2680 - 1.2785
Trend: Upward
Buy at 1.2694 SL 1.2662 TP 1.2771

USD/JPY
Trading range: 84.65 - 83.70
Trend: Downward
Sell at 84.52 87 84.84 TP 83.80

GBP/USD
Trading range: 1.5365 - 1.5475
Trend: Upward
Buy at 1.5377 SL 1.5345 TP 1.5465

USD/CHF
Trading range: 1.0185 - 1.0080
Trend: Downward
Sell at 1.0173 SL 1.0205 TP 1.0089

EUR/USD Trading range: 1.2680 - 1.2785; Trend: Upward; Buy at 1.2694; SL 1.2662; TP 1.2771...

31 August 2010
Review of Last Week

ENERGY
Crude Oil – Oil ended higher on Friday, gaining for the third consecutive day and ending the week on the plus side for the first time in three weeks, after markets were reassured by comments from Federal Reserve Chairman Ben Bernanke that the central bank was prepared to act if needed to bolster slowing economic growth. Also supporting prices last week was data showing that US initial jobless claims fell for the previous week and the dollar's weakness against the euro and a basket of currencies.

Crude oil bounced off an 11-week low on Wednesday shrugging off US government data showing across-the-board rises in crude oil and product inventories. US crude oil stocks rose more than expected last week as imports increased and refining activity slowed, while oil products also rose, boosting US commercial crude and product stocks to a new high. Domestic crude stocks rose 4.1 million barrels to 358.3 million barrels in the week to August 20 as refineries cut their utilisation rates, according to a weekly report from the Energy Information Administration. Analysts had expected a 200,000-barrel build in crude stocks. Distillate stocks rose 1.76 million barrels to 176 million barrels, more than expectations for a 1.1 million barrel rise. Stocks of gasoline rose by 2.27 million barrels to 225.6 million barrels, against analyst expectations for a 400,000 barrel draw.

Natural Gas –-Gas ended down sharply on Friday, as moderating summer heat in the US, no Gulf Coast storm threats and concerns about growing supplies drove it to another 11-month low. Gas has tumbled 14 percent in eight straight losing sessions and 26 percent so far this month, as high supplies and moderating weather put the bears in control. Despite the improved storage picture, builds have fallen short of the five-year average for 10 straight weeks, most traders remain bearish, with summer heat fading, storage still ample and production at its highest level in nearly 40 years.

The US Energy Information Administration report showed total domestic gas inventories rose last week by 40 billion cubic feet to 3.052 trillion cubic feet, a level not normally reached until the second week of September. Most traders saw the build as slightly bearish because it was above market expectations in the 38 bcf area, but some said it was supportive, noting it was well below the year-ago gain of 53 bcf and the five-year average increase of 59 bcf. The EIA report showed the storage deficit to year-ago grew by 13 bcf to 198 bcf, or 6 percent, while the surplus to the five-year average fell 19 bcf to 177 bcf, still a comfortable 6 percent cushion to help rebuild stocks for next winter. A recent EIA estimate still put US gas output this year above 22 trillion cubic feet, its highest level since 1973. Early injection estimates for this week's EIA report range from 43 bcf to 61 bcf, versus a 64-bcf build for the same week last year and a five-year average gain of 62 bcf.

FOREX
Forex – The dollar rose against the yen and the Swiss franc on Friday after US Federal Reserve Chairman Ben Bernanke said the Fed was prepared to provide stimulus to boost a US economic recovery that had slowed more than expected, but did not say how or when. Analysts said the dollar would remain supported because Bernanke gave no firm commitment the central bank would provide additional easing, which could put downward pressure on interest rates. The Fed also did not make clear what would prompt such measures, they noted. US Federal Reserve Chairman Ben Bernanke said on Friday the economic recovery has softened more than expected and the Fed is ready to take further steps if needed to spur the stumbling economy. Bernanke said the US central bank's purchases of longer-term securities have been effective in lowering borrowing costs and that he believes the benefits of buying more such assets, if needed, would outweigh any disadvantages. Other options, such as committing to hold rates exceptionally low for an even longer period than is currently priced in to markets, or raising the Fed's inflation targets, would be less effective, he said. However, he made clear the Fed has not decided what would prompt additional Fed easing.

The dollar got a lift after the government released its revision for second-quarter US GDP growth, with figures that were slightly better than market expectations. Gross domestic product growth, the measure of total goods and services output within US borders, was revised down to only 1.6 percent, from 2.4 percent, the Commerce Department said. The economy grew at a 3.7 percent pace in the first quarter of 2010. Many economists had forecast an even bigger downward revision to only 1.4 pct growth, but most still do not believe the economy will slide back into recession and say the most likely prospect is for continued slow expansion.

The dollar had sold off against a basket of currencies earlier last week after a report showed sales of previously owned US homes fell to their slowest pace in 15 years during July. Sales of previously owned US homes dropped more steeply than expected in July to their lowest pace in 15 years, an industry group said on Tuesday, implying further loss of momentum in the economic recovery. The National Association of Realtors said sales dropped a record 27.2 percent from June to an annual rate of 3.83 million units, the lowest level since May 1995. June's sales pace was revised down to a 5.26 million-unit pace. Analysts expected existing home sales to tumble 12 percent to a 4.70 million-unit pace from the previously reported 5.37 million units in June.

INDICES
Indices – Global stocks rose on Friday, as bargain hunters erased early losses sparked by downbeat remarks on the economy from Federal Reserve Chairman Ben Bernanke and a warning of lower revenues by bellwether Intel. The combination of the two factors sent stocks reeling and caused a surge of safe-haven buying of the US dollar. But those losses proved short-lived. The accumulation of gloomy economic data and market losses for much of August proved too tempting for investors looking to pick up assets on the cheap. Even US economic data showing a sharp downward revision in second quarter gross domestic product was less gloomy than economists expected and underpinned share prices in Europe as well as on Wall Street. For the week the Dow industrials fell 0.61 percent, the S&P 500 lost 0.66 percent and the Nasdaq dropped 1.19 percent. In Europe, strong earnings helped boost shares from five week closing lows and in Japan, buyers stepped in after four-days of losses to pull the Nikkei up from a 16-month trough.

Stocks initially fell after Bernanke said the central bank was ready to counter a softening recovery, saying unconventional measures would be considered, but gave no hints on what the Fed intended to do. But the Fed chairman downplayed concerns the economy might slip back into recession, reassuring investors spooked by his recent comments that the economy faced "unusual uncertainty."

COMMODITIES
Commodities – Oil, corn, coffee and base metals like copper, along with many other commodities, posted sharp gains on Friday, lifted by a revision to US growth that was not as severe as anticipated and following comments by Fed chief Bernanke that calmed fears of double-dip recession. But not all markets were cheered by the glimmer of positive news in each of the big economic items for the day. Gold, for example, trimmed early gains after Federal Reserve chairman Ben Bernanke said the Fed was ready to act to bolster flagging growth if needed. Some gold investors relinquished their need for a safe-haven investment. Gold's modest rise by the end on Friday contributed to a fourth straight week of hikes, as a slew of weak economic reports had kept investors, fearful of double-dip recession, buying for its appeal as a safety play. In remarks prepared for delivery at a Fed conference, Federal Reserve Chairman Ben Bernanke said the US recovery has softened more than expected, but the Fed is ready to take further steps if needed to spur the stumbling economy. His remarks followed the US Commerce Department's downwardly revised second-quarter growth estimate. The revision was less steep than analysts had forecast. US copper prices rose to their highest close since August 4, on the Fed's positive outlook.

Crude Oil – Oil ended higher on Friday, gaining for the third consecutive day and ending the week on the plus side for the first time in three weeks...

31 August 2010
JPY Ignores Upbeat Japanese July Industrial Production & Retail Trade Data

Both Japanese industrial production and retail trade data for July beat economists’ expectations. Preliminary industrial production rose by 0.3% on the month in July, surprising the consensus forecast for a 0.2% fall and more than erasing the previous 1.1% drop. Meanwhile, industrial production gained an annual 14.8%, above expectations for a 14.3% rise to follow the 17.3% increase in June.

Japanese retail trade data was also stronger than the consensus in July. Retail trade rose 0.7% on the month, overarching calls for a 0.5% gain to follow the revised 0.4% increase in June. In annual terms, retail trade gained 3.9% in July compared to calls for a 3.5% rise and exceeding the 3.2% increase the month before.

However, the yen failed to make gains on the relatively upbeat data. USD/JPY traded in a tight range around 84.60 yen, with the pair essentially oblivious to the data. In the medium term, the yen has correlated better with global risk aversion/appetite than Japanese economic indicators.

Both Japanese industrial production and retail trade data for July beat economists’ expectations...

31 August 2010
U.K. July Mortgage Approvals Beat Expectations

The number of mortgages approved in the U.K. rose in July compared to June and came in above expectations, official figures showed on Tuesday.

The Bank of England said a total of 48,722 mortgages were approved during July, up from the 48,562 approved in June. Economists had forecast approvals to total 46,500.

At the same time, total net lending to individuals rose GBP 0.3 billion, up 0.8% from a year ago. Net lending secured on dwellings increased GBP 0.1 billion, below the June increase of GBP 0.5 billion.

Consumer credit rose by GBP 0.2 billion, above the June decrease of GBP 0.1 billion.
The number of mortgages approved in the U.K. rose in July compared to June and came in above expectations, official figures showed on Tuesday.

The number of mortgages approved in the U.K. rose in July compared to June and came in above expectations, official figures showed on Tuesday...

31 August 2010
Euro Selling May Resume as German Jobs Data Underscores ECB Paralysis

Euro selling may resume in European trading hours after the single currency paused to consolidate in the overnight session as robust German jobs data highlight the economic disparity and likely monetary policy paralysis in the Euro Zone.

Key Overnight Developments

Japanese Industrial Production Outperforms But Outlook Still Gloomy
Australian Retail Sales, Building Permits Fail to Boost Rates Outlook
New Zealand Dollar Broadly Sold as Finance Firm Files for Receivership

Critical Levels

CCY	SUPPORT	RESISTANCE
EURUSD	1.2606	1.2721
GBPUSD	1.5414	1.5537

The Euro and the British Pound were little changed in overnight trade as prices consolidate NY-session losses against the US Dollar, with the safety-linked greenback capitalizing on renewed risk aversion. We remain short EURUSD and flat GBPUSD.

Asia Session Highlights

CCY	GMT	EVENT	ACT	EXP	PREV
NZD	22:45	Building Permits (MoM) (JUL)	3.1%	2.0%	3.3%
GBP	23:01	GfK Consumer Confidence Survey (AUG)	-18	-24	-22
JPY	23:15	Nomura/JMMA Manufacturing PMI (AUG)	50.1	-	52.8
JPY	23:50	Industrial Production (MoM) (JUL P)	0.3%	-0.2%	-1.1%
JPY	23:50	Industrial Production (YoY) (JUL P)	14.8%	14.3%	17.3%
JPY	23:50	Loans & Discounts Corp (YoY) (JUL)	-4.2%	-	-4.1%
JPY	23:50	Retail Trade s.a. (MoM) (JUL)	0.7%	0.5%	0.4%
JPY	23:50	Retail Trade (YoY) (JUL)	3.9%	3.5%	3.3% (R+)
JPY	23:50	Large Retailers' Sales (JUL)	-1.2%	-1.3%	-3.1% (R-)
AUD	1:30	Retail Sales s.a. (MoM) (JUL)	0.7%	0.4%	0.4% (R+)
AUD	1:30	Private Sector Credit (MoM) (JUL)	0.1%	0.3%	0.2%
AUD	1:30	Private Sector Credit (YoY) (JUL)	2.8%	3.0%	2.9% (R+)
AUD	1:30	Building Approvals (MoM) (JUL)	2.3%	-0.7%	-3.3%
AUD	1:30	Building Approvals (YoY) (JUL)	11.0%	6.1%	14.2% (R+)
AUD	1:30	Current Account Balance (Australian Dollar) (2Q)	-5640M	-6500M	-16457M (R-)
AUD	1:30	Australia Net Exports Share of GDP (2Q)	0.4%	0.3%	-0.5%
JPY	1:30	Labor Cash Earnings (YoY) (JUL)	1.3%	-	1.5%
JPY	4:00	Vehicle Production (YoY) (JUL)	16.8%	-	25.9%
JPY	5:00	Housing Starts (YoY) (JUL)	4.3%	2.0%	0.6%
JPY	5:00	Construction Orders (YoY) (JUL)	-0.7%	-	-10.2%
JPY	5:00	Annualized Housing Starts (JUL)	0.772M	0.756M	0.750M
JPY	5:00	Small Business Confidence (AUG)	48.4	-	48.1

Preliminary Japanese Industrial Production figures surprised to the upside, showing output added 0.3 percent in July amid expectations for a 0.2 percent decline. Looking past month-to-month volatility however, the overall trend continues to point deterioration amid expectations of slowing demand in Japan’s largest export markets it the US and China. The annual growth rate fell for the fourth month since topping out in March, printing at 14.8 percent to reveal the lowest reading yet this year. Augusts’ Nomura/JMMA PMI gauge reinforced a cautious outlook on where things go from here, showing manufacturing sector growth eased to the slowest in 14 months. Separately, Retail Trade added 0.7 percent in July – the most in four months – as car and clothing sales led receipts higher with gains of 3.2 and 2.9 percent, respectively.

Australian economic data offered a mixed picture once again: Retail Sales outperformed, adding 0.7 percent, while Building Approvals soared 2.3 percent, snapping a three-month losing streak; meanwhile, Private Sector Credit fell short of expectations, posting the smallest increase in eight months. While the former two results hint the economy is starting to digest the downdraft from higher borrowing costs after the RBA led other central banks to add 150bps to benchmark borrowing costs between October 2009 and May of this year, the latter suggests otherwise. On balance, the recently patchy data flow seems unlikely to force a re-evaluation of traders’ conviction about the outlook for monetary policy and thereby the Australian Dollar, with anything shy of uniform resilience unlikely to alleviate concerns about mounting global headwinds. Indeed, a Credit Suisse gauge of rate hike expectations for the year ahead actually declined 6bps after today’s figures crossed the wires to the lowest level in 15 months. Separately, the Current Account deficit narrowed more than economists expected to print at –A$5640 million in the second quarter, an outcome that proved hardly surprising after yesterday’s corporate profits figures for the same period.

The New Zealand Dollar slumped against all of its major counterparts after South Canterbury Finance Ltd filed for receivership, meaning the government will be taking responsibility for repaying all of the firm’s depositors to the tune NZ$1.6 billion. The announcement weighed on the markets’ confidence in New Zealand assets, sending the Kiwi as much as 1.04 percent lower against a trade-weighted average of other top currencies.

Euro Session: What to Expect

CCY

GMT

EVENT

EXP

IMPACT

CHF