The dollar and yen rose while risk assets fell on Wednesday. Yesterday's dovish Fed outlook on the US economy and slowing Chinese economic growth pressured the risk prone currencies and asset prices. China showed further signs of economic slowdown as industrial production and retail sales slackened. The June US trade deficit widened to the highest level since October 2008. The larger-than-expected trade shortfall will reduce Q2 2010 US GDP growth.
The S&P 500 plunged 31.59 to 1,089.47. The dollar index surged to 82.35 and broke the important diagonal resistance in the 82 area; thus, indicating further medium-term gains are likely. The USD/JPY tested the November 27 low before paring some losses. The EUR/USD plunged and broke the 1.29-area support. The Australian and Canadian dollars were pressured by falling commodity prices. The AUD/USD dropped below its 0.90 support and the USD/CAD rose to the highest level in two weeks.
The GBP/USD fell on concern about global economic growth and a Bank of England downgrade of the UK economy. The BOE said inflation will be about 1.5% at the end of 2012, below its 2.0% target, and cut its UK GDP growth forecast to a 3.0% annual pace instead of the 3.6% rate forecast in May. The news increased speculation the central bank will increase its quantitative easing measures. The GBP/USD fell for a third consecutive day, following its failure to break the 1.60 resistance. Supports are in the 1.56 area and from the uptrend line. If the uptrend is broken, the GBP/USD outlook will deteriorate further. Resistances are in the 1.58 and 1.60 areas.
Financial and Economic News and Comments
US & Canada
The US trade deficit in goods and services unexpectedly widened to $49.9 billion in June, the highest level since October 2008, from a revised $42.0 billion shortfall in May (vs. previously reported -$42.3 billion), data from the Commerce Department showed. The $7.9 billion deficit widening was the most since records began in 1992. Imports rose 3.0% m/m to $200.3 billion in June, led by telecommunications equipment, automobiles and record consumer goods. Exports declined 1.3% m/m, the most since April 2009, to $150.5 billion, led by widespread losses for semiconductors, computers and fuel oil.
The US government's monthly budget statement showed -$165.0 billion in July, the 22nd straight deficit, compared with -$68.4 billion in June and -$180.7 billion in July 2009, according to a report released by the Treasury Department.
Canada's trade deficit unexpectedly widened to C$1.13 billion ($1.08 billion) in June from a revised C$695 million shortfall in May (vs. previously reported -C$503 million), figures from Statistics Canada showed. Exports fell 2.5% m/m in June, the most in 10 months, to C$33.5 billion, led by industrial goods and materials. Imports declined 1.2% m/m to C$34.6 billion, led by energy products.
UK jobless claims declined a less-than-expected 3,800 in July, a sixth straight monthly slide, to 1.46 million, after a revised 15,900 drop in June, according to data from the Office for National Statistics. The claimantcount rate was unchanged at 4.5%. Unemployment based on International Labour Organization methods fell 49,000 to 2.46 million in the three months to June, the largest fall since 2007, and the ILO UK unemployment rate was 7.8%. Growth in average weekly earnings including bonuses slowed to 1.3% y/y in the three months to June from 2.7% y/y in the three months to May, and growth in average weekly pay excluding bonuses eased to 1.6% y/y from 1.8% y/y.
The Nationwide UK consumer confidence index fell to a lower-than-expected 56 in July from 63 in June, indicating UK consumer sentiment slumped for a third consecutive month to its lowest level since April 2009, data from Nationwide showed.
Japan's private-sector machinery orders, excluding volatile ones, increased a less-than-expected 1.6% m/m to ¥704.0 billion ($8.2 billion) in June, the third month-on-month gain in four months, after a 9.1% m/m May decline that was the biggest since August 2008, according to data from the Cabinet Office. Core machinery orders will rise 0.8% q/q in Q3 2010 after they increased 0.3% q/q in Q2, the Cabinet Office forecast, maintaining its view that they are showing signs of picking up. June core machinery orders fell 2.2% y/y, following a 4.3% y/y May gain.
Japan's domestic corporate goods prices fell for a second month in July, edging down 0.1% m/m, after a 0.4% m/m June decline, the Bank of Japan corporate goods price index showed. July domestic corporate goods prices slipped 0.1% y/y, the first year-on-year decline in three months, following a downwardly revised 0.4% y/y June increase.
The Westpac-Melbourne Institute Australian consumer sentiment index rose 5.4% m/m to 119.2 in August after an 11.1% m/m advance to 113.1 in July, indicating Australian consumer confidence rose for a second month to its highest level since January, according to the latest Westpac Banking Corp. and Melbourne Institute survey. The current condition index increased to 117.2 in August from 112.2 in the previous month. The expectation index climbed to 120.5 from July's 113.7.
FX Strategy Update
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