* The dollar was lower versus the commodity currencies on Monday but higher against other key currencies. Asian and European stock markets rose, but the S&P 500 declined a modest 0.56 points to 1,025.57. The yen fell modestly as Nikkei rallied over 3%. Sterling dropped for a fourth day, struggling to stay above the 1.64- handle support The Australian and Canadian dollars gained for a fifth straight day, boosted by higher commodity prices. The loonie was also supported by Canada's better-than-expected retail sales.

* The EUR/USD fell for the first day in five. European Central Bank President Trichet stated that the economic recovery would be uneven and the ECB would not exit emergency stimulus soon. Today's release on strongerthan- expected eurozone industrial new orders did not substantially support the EUR/USD. The pair has been highly correlated with risk aversion and equity markets. The risk appetite trades may explain why the US-EMU 10-year interest spread has broken down since April. Usually higher US interest rates would pressure the EUR/USD as shown in the 10-year interest rate chart (below the EUR/USD chart). However, the US 10-year yield has risen relatively to the European yield, while the euro rose. We believe a renewed focus on the yield spread or a possible correction in the stock market may pressure the EUR/USD. There are resistance in the 1.44-1.45 area and supports from the long-term uptrend and in the 1.40-area.


Financial and Economic News and Comments

US & Canada

  • The US-EMU 10-year interest rate spread, used to determine the EUR/USD, has diverged since the spring.


* The Chicago Fed national activity index increased to -0.74 in July from a revised -1.82 in June, indicating further improvement in overall economic activity, the Federal Reserve Bank of Chicago said.

* The Chicago Fed Midwest manufacturing index rose 2.6% m/m in July to a seasonally adjusted 79.7, indicating Midwest manufacturing output posted its first gain in over a year and the highest level since September 2003, after a revised 0.3% m/m decline to 77.7 in June, the Chicago Fed reported.

* Canada's retail sales increased a more-than-expected 1.0% m/m in June to C$34.363 billion ($31.8 billion), the fifth gain in six months, after a downwardly revised 1.1% m/m increase in May, according to figures from Statistics Canada. Retail sales less autos rose for a second consecutive month, rising a more-than-expected 1.0% m/m, after May's downwardly revised 0.6% m/m increase. Retail sales advanced in six of eight sectors, led by a 2.1% m/m increase in the automotive sector. A 4.7% m/m gain in sales at gasoline stations was the key contributor to June's rise in the automotive sector. June retail sales fell 4.4% y/y and fell 3.6% y/y excluding autos.



  • Eurozone industrial new orders rose a more-than-anticipated 3.1% m/m in June, the largest gain in 19 months, after a revised 0.5% m/m decline in May, data from Eurostat showed. June industrial new orders fell a lessthan- expected 25.1% y/y, a 11th consecutive fall, following May's revised 30.3% y/y drop. Excluding ships, railway and aerospace equipment, industrial new orders increased 1.9% m/m in June but decreased 26.7% y/y.



  • Japan’s supermarket sales continued their declines in July, falling 4.8% y/y, after June’s 4.4% y/y decrease, the Japan Chain Stores Association reported.
  • China’s government will maintain its fiscal and monetary policies as the economic recovery is not stable yet, Chinese Premier Wen Jiabao said, adding that “decline in external demand may continue for a longer time” and excess production capacity may restrain industrial growth.

FX Strategy Update

Primary TrendPositiveNegativePositiveNegativeNegativePositiveNeutral
Secondary TrendNeutralNeutralNeutralNeutralNeutralNeutralNeutral
Start Position1.4142N/A1.48451.0649N/A0.6601N/A