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- Euro Mixed as Euro-zone Trade Surplus Expands
- British Pound Down as Forecasts Show UK GDP May Have Fallen by Record in Q2 from a Year Ago
- Canadian Dollar Dominates as CPI Meets Forecasts, Australian Dollar Faces Heavy Event Risk Next Week

US Dollar, Japanese Yen Gain But Most Pairs Remain Range Bound, Setting Stage for Breakouts
The US dollar and Japanese yen ended Friday mostly stronger against the majors, but for what it's worth, currency pairs like EUR/USD, GBP/USD, and USD/CHF remain within clear trading ranges, making intraday moves unremarkable. Looking to the data on hand, US housing figures were better than expected as the Commerce Department said that starts rose 3.6 percent in June to an annual rate of 582,000 while building permits jumped 8.7 percent to an annual rate of 563,000. This marked the second straight month of improvement for both indices, and while housing starts are still down 46 percent from a year ago and permits are down 52 percent, NAR existing home sales have also risen in recent months and median prices have gained since January, suggesting that we are seeing signs of stabilization. That said, a jump in average 30-year fixed-rate mortgage rates during June to a 6-month high of 5.42 percent (according to Freddie Mac) could put the kibosh on that if borrowing costs continue to rise while labor market conditions are still deteriorating.

In other US news, Bank of America and Citigroup both reported better-than-expected Q2 earnings, but the big concern through the weekend and into next week is the status of CIT Group. The large and troubled commercial lender was denied additional government aid and unless the firm finds alternative financing, a bankruptcy filing could be on the way. The government has essentially suggested that CIT's failure is not a systemic risk by denying them another bailout, but a bankruptcy would be a harsh reality check by serving as proof of how fragile the financial markets remain. As a result, there is potential for disappointing CIT-related new to trigger risk aversion in the near-term and spark flight-to-quality toward the US dollar and Japanese yen, while weighing on carry trades and stocks.

Related Article: JPY Driven by Risk Trends, Threat of Political Instability Looms

Euro Mixed as Euro-zone Trade Surplus Expands
The euro ended on a mixed note on Friday as EUR/USD failed to break above resistance at 1.4150 while EUR/JPY couldn't push above Thursday's high of 133.41. Economic data from the Euro-zone was a bit better than anticipated, as the region managed to reach a trade surplus for the second straight month in May, expanding to a seasonally adjusted 800 million euros from 700 million euros (revised up from -300 million euros). A breakdown of the report wasn't hugely optimistic though, as the surplus only occurred because imports fell more than exports, with the former down 2.8 percent and the latter down 2.7 percent.

British Pound Down as Forecasts Show UK GDP May Have Fallen by Record in Q2 from a Year Ago
The British pound was the weakest of the majors on Friday, but GBP/USD remains within a large range of 1.60-1.66 and there are few signs that we'll see a break in the near-term. That said, there will be a few pieces of event risk for the British pound next week. The release of the minutes from the Bank of England's July 9 meeting on Wednesday may not be as market-moving as they've been in the past since comments are likely to be fairly neutral. Nevertheless Q1 GDP was at the bottom of the BOE's previous range of forecasts, which has left speculation that the central bank will expand their quantitative easing (QE) program to fester. As a result, if there are signs within the minutes that this is occurring, the British pound could take a hit. Meanwhile, Friday's 04:30 ET advanced reading of Q2 GDP for the UK is forecasted to contract for the fourth straight quarter at a rate of -0.3 percent, which could drag the year-over-year rate down to a fresh record low of -5.2 percent from -4.9 percent.

Related Article: USD, GBP May Respond to Bernanke Speech, UK GDP Next Week

Canadian Dollar Dominates as CPI Meets Forecasts, Australian Dollar Faces Heavy Event Risk Next Week
Canadian inflation reports were right in line with expectations, as the headline consumer price index (CPI) rose 0.3 percent during the month of June while the annual rate tumbled to a 54-year low of -0.3 percent. On the other hand, the Bank of Canada's core CPI measure stagnated during the month, leaving the annual rate to ease back to 1.9 percent from 2.0 percent. All told, the data indicates that volatile food and energy costs are behind much the headline price declines, and with inflation otherwise holding fairly steady, deflation probably isn't considered to be a huge risk amongst the BOC's policy makers. The USDCAD pair ended Friday trading above the 61.8 percent fib of 1.0783-1.1723 at 1.1143, which will become a line in the sand for the pair early next week as the level could offer a springboard for rallies, while a break lower could target the next level of support at 1.0985/1.1000.

The Canadian dollar could see a pickup in volatility on Tuesday at 9:00 ET as the Bank of Canada is expected to leave rates unchanged at 0.25 percent once again. After the Bank left rates unchanged on June 4, they said that they would maintain a neutral stance through June 2010, and the rest of the statement was relatively optimistic and didn't touch upon quantitative easing, which was first brought up in their April Monetary Policy Report. If we see a reiteration of the last policy statement, which seems quite possible given the improvements we've seen in some of the timeliest economic indicators, the Canadian dollar may gain slightly. However, if the Bank of Canada's comments reflect signs of pessimism or deflation concerns, the currency could fall sharply.

On Tuesday at 21:30 ET, Australia's headline consumer price index for Q2 is forecasted to rise 0.5 percent, while the annual rate may fall to a 10-year low of 1.5 percent from 2.5 percent. However, the Reserve Bank of Australia's core measures are projected to hold at more robust levels on an annual basis, with the trimmed mean anticipated to slip to 3.5 percent from 3.9 percent and the weighted median forecasted to slip to 4.1 percent from 4.4 percent. Such moves would tell us that prices for volatile items like energy are responsible for the steep drop in headline consumer prices, and unless the core measures plunge, the markets aren't likely to speculate over another rate cut by the RBA in August.

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Written by: Terri Belkas, Currency Strategist for DailyFX.com
E-mail:
tbelkas@dailyfx.com