Expert Analysis of Today's Market

• The dollar gained against most key currencies on mixed US economic data as jobless claims rose to an over 6-year high but June pending home sales unexpectedly increased over 5%. The dollar is overbought, at important technical resistances against its rivals. This may lead to some short-term consolidation, but the long-term USD outlook is positive. The dollar block currencies continued declining as their term-of-trade deteriorated on falling commodity prices. The Australian dollar fell to the lowest in more than four months and the Canadian dollar was close to a 1-year low. Sterling declined as the Bank of England held its key interest rate steady at 5.00% and UK July home prices fell. We lowered our GBP/USD stop to lock in profit. The USD/JPY fell modestly as US stocks declined; we sell the pair again after stopped out yesterday. The EUR/JPY fell and broke its short-term uptrend indicating further decline.


• The EUR/USD plunged after the European Central Bank kept its benchmark interest rate unchanged at 4.25% and ECB President Jean-Claude Trichet said risks to economic growth were now starting to materialize. Slumping European economic growth is making it difficult for the ECB to raise rates again this year despite strong inflationary pressures. The EUR/USD broke the significant 1.54 support today, implying further decline to the important 1.49 support. The pair, with its oversold condition, found support at the 1.53 handle today. We sell the pair despite the risk of a short-term bounce. Relative interest-rate and growth advantages that the euro has enjoyed are starting to reverse.

Financial and Economic News and Comments

US & Canada

• US initial jobless claims in the week ending August 2 unexpectedly rose 7,000 to 455,000, the highest level since March 2002, influenced by an indirect response to the Emergency Unemployment Compensation (EUC) program, the Labor Department said. The 4-week moving average of new initial jobless claims rose 26,750 to 419,500, the highest level since July 2003. Continuing jobless claims unexpectedly rose 31,000 to 3.311 million in the week ending July 26, the highest level since December 2003. The 4-week moving average of those continuing claims increased 27,000 to 3.201 million, the highest level since January 2004. Overall, the figures indicate a continued weak US labor market.

• The US pending home sales index unexpectedly increased 5.3% in June to 89.0, the highest level since October 2007, from 84.5 in May, the National Association of Realtors said. The unexpected sales rise, although a good indication, is not a clear signal that the US housing slump is over.

• US consumer credit rose a more-than-forecast $14.3 billion in June, the most since November, to $2.59 trillion, following an upwardly revised $8.1 billion increase in May, the Federal Reserve said. The Fed’s data does not include borrowing secured by real estate.

Europe

• The European Central Bank left its benchmark interest rate on hold at 4.25%. ECB President Jean-Claude Trichet, while acknowledging that eurozone economic growth will be “particularly weak” through Q3 2008, emphasized that maintaining price stability remained the ECB’s top priority. The ECB would “continue to monitor very closely” all price trends in the months ahead, Trichet said. He also said money and credit growth was robust and not subject to any constraints, adding that strong growth in the monetary supply was a potential harbinger of upside inflation risks.


• The Bank of England kept its key interest rate unchanged at 5.00% for a fourth consecutive month despite increasing evidence of a slowing UK economy.


• UK house prices fell 1.7% m/m in July, down 8.8% y/y, signaling deteriorating growth in the UK economy, mortgage lender HBOS PLC reported.


• Germany’s industrial production rose for the first time in four months in June increasing a less-than-expected 0.2% m/m, led by demand for plant and machinery, after declining a revised 1.8% m/m in May, data from the Economy Ministry showed. Industrial production rose 1.7% y/y.


• Germany’s foreign trade balance showed a €19.7 billion surplus in June, due to an increase on exports, compared with June 2007’s €16.7 billion surplus, the Federal Statistical Office (Destatis) reported. Upon calendar and seasonal adjustment, the foreign trade balance showed a €18.1 billion surplus in June. According to provisional data from Destatis, Germany exported commodities to the value of €88.3 billion and imported commodities to the value of €68.6 billion in June. Upon calendar and seasonal adjustment, exports and imports showed opposite month-on-month trends: German exports rose 4.2% m/m, while imports fell 0.1% m/m. Exports rose 7.9% y/y and imports rose 5.3% y/y.

Asia-Pacific

• Australia’s employment rose a stronger-than-expected 10,900 in July, after climbing a revised 22,200 in June, the Australian Statistics Bureau said. The unemployment rate held at 4.3%.


• Japanese machinery orders fell a less-than-forecast 2.6% m/m in June after declining 10.4% m/m in May, the Cabinet Office said.

FX Strategy Update