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- Euro Tests Former Support Following Strong ZEW Results, Swiss Franc Down Amidst Comments from SNB's Jordan
- British Pound Surges as UK CPI Goes Unchanged - BOE Meeting Minutes on Wednesday
- Canadian Dollar Up Slightly Ahead of Canadian CPI Report

US Dollar, Japanese Yen - Why the Low-Yielders' Rally May Not Be Over Yet
The US dollar and Japanese yen were the weakest of the majors, giving up most of their gains from Monday, as FX carry trades and equities bounced, with the S&P 500 closing up 1 percent at 989.67. The market showed little reaction to US data, as the producer price index (PPI) fell more than anticipated at a rate of -0.9 percent in August, amidst weaker energy prices. Ultimately, this brought the annual rate of growth down to a record low of -6.8 percent, but even excluding volatile factors like food and energy, annual pace of growth slowed to more than one-year low of 2.6 percent pace from 3.3 percent. Meanwhile, housing starts unexpectedly fell 1 percent in July to an annual pace of 581K while building permits dipped 1.8 percent to an annual pace of 560K. As leading indicators for other US housing reports, the data doesn't bode well for upcoming new and existing home sales and suggests that cheaper prices, lower interest rates, and an $8000 tax credit for many new homebuyers will not be enough to fully counter the impact of rising unemployment.

Looking ahead, there will be no key US data released on Wednesday. We have reason to believe, however, that the rise we saw in risky assets on Tuesday will not last. First, according to Technical Strategist Jamie Saettele on the DailyFX Forex Stream, trading volume in stocks this week has been at its lowest since July 2, 2009 (ahead of the US Independence Day holiday), December 24/26, 2008 (before and after the Christmas holiday), and November 28 (the day after the US Thanksgiving Day holiday), suggesting the increase will not last. Indeed, meaningful rallies typically occur only with higher trading volumes. Second, a quick Google News search of carry trade shows that optimism may be hitting an extreme, as evidenced by the trumpeting a headline like Why the ‘Carry Trade' is Back in a major media publication (the Wall Street Journal). Also, the August 2009 issue of Futures Magazine shows a bull in the mist, suggesting that a bull market in stocks is emerging. Third, on Monday the Federal Reserve's Senior Loan Officer Survey showed that banks tightened lending in Q2 due to a more uncertain economic outlook, suggesting that credit conditions are nowhere near normal and adding to evidence that the financial sector could continue to lead the US stock market on a gradual decline.

We noted yesterday that pairs like, EURUSD, GBPUSD, EURJPY, GBPJPY, and NZDJPY, among other, broke below trendlines that have served as support since early to mid-July, and on Tuesday those levels were tested as they now form resistance. Given the noted signs of an important turn lower in equities and FX carry trades, there looks to be great upside potential for safe haven currencies like the US dollar and Japanese yen in coming weeks.

Related Articles: Dollar Long Term Bull Resumes, US Dollar Weekly Trading Forecast, Japanese Yen Weekly Trading Forecast

Euro Tests Former Support Following Strong ZEW Results, Swiss Franc Down Amidst Comments from SNB's Jordan
The euro made headway on Tuesday, with EURUSD testing former trendline support at 1.4150, after the release of the German ZEW survey, as the index of investor sentiment was much better than expected. Indeed, the gauge measuring economic expectations increased to a more than 3-year high of 56.1 in August from 39.8, while the index measuring sentiment on the current situation edged up to a 7-month high of -77.2 from -89.3. Overall, the steady rise in equities since March was indicative of a recovery in risk appetite, though that tide seems to be shifting at the moment.

The Swiss franc counted itself as the third weakest of the majors, as the currency has maintained its status as a safe-haven currency. There was no Swiss data on hand, but there was important commentary on the wires. Swiss National Bank board member Thomas Jordan was quoted in a newspaper as saying that the SNB saw the US and European recession easing, that recovery in Europe will begin in early 2010, though it will be weak and faces downside risks. On intervention, Jordan said that the SNB is content with the current EURCHF range and that the market has understood the central bank's intervention policy well. At the same time, he said that the SNB will continue purchases of franc bonds and that it's too early to start normalizing SNB policy.

British Pound Surges as UK CPI Goes Unchanged - BOE Meeting Minutes on Wednesday
The British pound surged this morning on news that the UK consumer price index (CPI) went unchanged during July, as forecasts had been calling for a 0.3 percent contraction on a monthly basis. This ultimately kept the year-over-year rate at 1.8 percent, which is below the Bank of England's 2 percent target but within their acceptable inflation range of 1 percent - 3 percent, and suggests that the central bank won't rush to expand the quantitative easing program again before year-end. Looking ahead to Wednesday, the minutes from the BOE's August meeting will be released. However, they may not expose new information as the BOE's August 6 policy statement and August 12 Quarterly Inflation Report have already revealed a dovish bias and dour outlooks by the Monetary Policy Committee. That said, following the latest UK CPI results, Credit Suisse overnight index swaps have shifted to price in 99.5 basis points work of hikes by the BOE over the next 12 months, up from 91.1 basis points on Monday. As a result, if the minutes highlight a clearly dovish bias by the BOE, the market's focus may shift back toward the central bank's liberal stance on quantitative easing, and the British pound could fall sharply.

Related Article: British Pound Weekly Trading Forecast

Canadian Dollar Up Slightly Ahead of Canadian CPI Report
The Canadian dollar gained against the US dollar and Japanese yen, but upcoming event risk could shake the commodity dollar up. Headline CPI for July is projected to fall to an annual rate of -0.8 percent - the lowest since 1953 - from -0.3 percent, while the Bank of Canada's core measure is projected to hold steady at 1.9 percent. Such results would suggest that any price declines are due purely to falling commodity costs, and as long as the core measures don't fall sharply, the Canadian dollar shouldn't react too strongly. However, if broader price pressures start to fall more steeply, concerns about deflation may arise and weigh on the currency.

Related Article: Canadian Dollar Weekly Trading Forecast


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