Expert Analysis of Today's Market

• As global stock sell-offs continued, the dollar traded mixed while the yen surged against other major currencies on Friday. The US Q2 GDP rose a stronger-than-expected 3.4% but had little effect on the market as the dominant factors are carry-trade unwinding and risk re-pricing. The dollar got some support from the liquidation of carry-trades against other key currencies. The EUR/USD broke support at 1.37, setting the stage for a test at the 1.36-handle. The GBP/USD broke the 6-week uptrend and we expect a test of the 2.00-2.02 support. The Australian dollar dropped for the second day after making a multi-decade high versus the dollar. In cross-trades, the New Zealand dollar fell the most versus the yen since 2005 and the Australian dollar by the most in almost 6 years.


• The USD/CAD broke its 4-month downtrend. There is resistance in the 1.07 area; however, the pair is likely to rise to the 1.10 area. We buy the USD/CAD with an objective at 1.0970 and a stop at 1.0365.

Financial and Economic News and Comments

US & Canada

• The US economy expanded more than expected in the second quarter. Gross domestic product rose at a 3.4% q/q annual rate in Q2, the Commerce Department said. Consumer spending rose 1.3% in Q2 after increasing 3.7% in Q1. Consumer purchases of durable goods increased 1.6% in Q2 after rising 8.8% in Q1. Non-durables spending fell 0.8% in Q2 after increasing 3.0% in Q1. Residential fixed investment dropped, but the 9.3% decline was much smaller than previous quarters. US exports rose 6.4% and imports fell 2.6%. Trade added 1.18 percentage points to GDP, after reducing GDP by 0.51 percentage point in Q1. Overall the Q2 GDP report shows the US economy is relatively OK; however, the decline in imports indicates a sign of economic weakness.

• Inflation gauges were mixed. The government's price index for personal consumption surged 4.3% in Q2 after rising 3.5% in Q1. However, the PCE price gauge excluding food and energy rose just 1.4% in Q2 after rising 2.4% in Q1.


• The Commerce Department today revised GDP going back to Q1 2004. The US economy grew an average 3.2% from 2004 through 2006, 0.3 percentage point slower than previously reported.


• The Reuters/University of Michigan’s final index of consumer sentiment rose to 90.4 in July from a downwardly revised 85.3 in June. June’s final figure was the lowest in 10 months. June’s preliminary figure, released on July 13, showed the confidence level at 92.4.

Europe

• German consumer confidence rose to an 8-month high after unemployment fell to the lowest level in 12 years. GfK’s confidence index rose in line with expectations to 8.7 in August from 8.5 in July, GfK reported. However, consumer confidence in the economic outlook fell to 64.8 in August from 69 July. The decline in income expectations was less pronounced, with this sub-index declining to 27.9 from 28.7.


• German CPI inflation unexpectedly accelerated to 2.2% y/y in July from 2.0% y/y in June, the Federal Statistics office reported.

Asia-Pacific

• Japan’s retail sales unexpectedly fell 0.4% in June, the Trade Ministry said.


• Japanese consumer prices excluding fresh food fell 0.1% y/y in June, the Japanese government said. Tokyo’s core prices also fell 0.1% y/y in July, the statistics bureau said. The declines in consumer prices nationwide and in Tokyo were in line with expectations. The Bank of Japan is likely to refrain from raising interest rates at its next meeting.

FX Strategy Update