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- Euro, British Pound Rebound Amidst Signs of Improving Trade, BOE Issues Neutral Policy Statement
- Canadian Dollar Mostly Lower Despite Surge in Housing Starts
- Swiss Franc Still Range Bound - SNB Intervention Risk Looms

US Dollar, Japanese Yen Lose Out in Day of Retracements as S&P 500 Stubbornly Holds Above 880
The US dollar and Japanese yen were the weakest of the majors on Thursday as currencies retraced many of the sharp moves we saw yesterday, with the British pound staging the biggest rebound. Highlighting the resilience of risky assets was the S&P 500, which has managed to hold above the neckline of a head and shoulders pattern on the daily charts at 880, despite intraday spikes lower. Going forward, this formation will be important as a gauge of broader risk appetite, and due the strong link between FX carry trades and equities, it will be a strong signal of where the JPY crosses will go next as well.

For what it's worth, many of the major currency pairs still remain range bound, and the US dollar showed little reaction to a report from the US Commerce Department, which said that wholesale inventories fell for the ninth straight month in May, this time by 0.8 percent. On the other hand, wholesale sales actually rose for the first time since February, which helped push the inventory/sales ratio down to match the November 2008 low of 1.29 from 1.31. All told, the data suggests that businesses are doing a better job of cutting back supply levels to match demand.

In other US economic news, the Labor Department said that initial jobless claims fell by 52,000 to 565,000 during the week ending July 4, but because of the holiday week, this number may be somewhat skewed. As a result, the surge in continuing jobless claims of 159,000 to a fresh record high of 6,883,000 during the week ending June 27 seems a bit more convincing as a gauge of actual labor market conditions. That said, we already know from last week's NFP report that the pace of job losses accelerated during June, limiting the usefulness of the results. Meanwhile, the International Council of Shopping Centers (ICSC) said that same-store sales tumbled 5.1 percent in June from a year earlier, marking the sharpest decline since March and suggesting that next week's US Advance Retail Sales results could be disappointing.

On Friday, data may show that the US trade deficit widened for the third straight month in May to $30 billion as exports continue to dive, and the preliminary reading of the University of Michigan's consumer confidence index for July is projected to fall very slightly to 70.6 from 70.8. However, there is downside potential in light of the sharp drop we saw in the Conference Board's surprise drop in consumer confidence during June. Lastly, there will be lingering event risk stemming from the Group of Eight (G8) meeting, which will extend through July 10. According to a program outline on the G8 Summit site, participating government leaders will discuss the impact of the crisis on Africa and food security, but comments are likely to be published throughout the day, which leaves ample room open for market-moving commentary.

Euro, British Pound Rebound Amidst Signs of Improving Trade, BOE Issues Neutral Policy Statement
The euro and British pound both shot higher today, due mostly to a US dollar pullback. However, there were also supportive fundamental forces on hand amidst evidence that export demand in the Euro-zone appears to be picking up, as seen in trade reports from some of the region's biggest trade partners: Germany and the UK. First, the German Federal Statistics Office said that the nation's trade surplus expanded to 9.6 billion euros in May as exports rose 0.3 percent (seasonally adjusted) and imports tumbled 2.1 percent (seasonally adjusted).

Likewise, the UK's Office for National Statistics reported that the nation's trade deficit narrowed to 6.3 billion pounds in May, the least in three years, due primarily to a 4 percent drop in imports. While overall exports fell by 0.8 percent, shipments to European Monetary Union (EMU), EU25, and EU 27 countries all rose, highlighting how dependent the UK economy is on a Euro-zone recovery. Another driver of strength for the British pound came from the Bank of England, which left the Bank Rate unchanged at 0.50 percent and signaled no changes to their quantitative easing program. Based on the broad gains made by the British pound, it is clear that the markets had been anticipating a statement in which the BOE would indicate that they would step up their gilt purchases. Nevertheless, the latest policy statement said that the BOE will review the scale of its QE program and its inflation expectations during their August meeting, making the next statement very important to watch.

Canadian Dollar Mostly Lower Despite Surge in Housing Starts
The Canadian dollar initially gained this morning after Canada Mortgage and Housing Corp. said that housing starts jumped by 8 percent to an annual rate of 140,700 in June, outpacing forecasts for a rise to 130,000. The data offers signs of improvement in the Canadian housing sector and suggests that the nation could be on the road to recovery. The currency ultimately ended the day up against the ultra weak US dollar and Japanese yen, but slipped against the rest of the majors. On Friday at 7:00 ET, the Canadian net employment change may show a decline of 35,000 during June following a drop of 41,800 in May. Furthermore, the unemployment rate is anticipated to have risen to match the January 1998 high of 8.7 percent from 8.4 percent. Since the employment change tends to be a very volatile release, this should have the greater impact on the Canadian dollar, with a sharper than expected drop likely to weigh on the currency and an unexpected positive result likely to push it higher.

Swiss Franc Still Range Bound - SNB Intervention Risk Looms
EUR/CHF remains within an intraday falling channel formation, with support now at 1.5110 and resistance at 1.5200. This pair is important to watch as the Swiss National Bank (SNB) has cited the appreciation of the Swiss franc against the euro as a risk for deflation, and has physically intervened in the currency markets within the past two weeks. Also, last Thursday, SNB directorate member Thomas Jordan said that they continue to consider interventions to prevent an excessive rise in the Swiss franc. As a result, traders should beware that the further EUR/CHF falls, the greater the potential for intervention grows.

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Written by: Terri Belkas, Currency Strategist for