The final capitulation?

The final capitulation?
In last week's report, I held out the prospect that the US government rescue package might result in a change in sentiment in financial markets and signal the start of the healing process. I also noted "The major risk to this outlook is that I am premature and there is a final spasm of market pessimism, resulting in a capitulation collapse across asset classes." Unfortunately, my timing was off and the latter outlook proved to be the case, well beyond my worst nightmares. But in this process, there are many rays of hope. One of the contrarian indicators that suggest a market is in the process of bottoming is a final plunge, usually driven by panic selling emanating from emotionally ravaged investors. Such was certainly the case this week, culminating on Thursday and Friday with massive declines. But on Friday, the collapse was not sustained and US stock exchanges managed to finish near flat on the day. One of the other indicators of a market bottom is just such a day's price action, best symbolized as a 'star' on daily candlestick charts. The long tail at the bottom represents the final wave of selling which was ultimately reversed by new buying entering the market. While I run the risk of being premature again, I remain optimistic that this was indeed a key reversal day.

Lost in the panic this week were the novel steps taken by global central banks to address the credit market freeze and limit its impact on their non-financial, 'real' economies. Among these are the Fed's decisions to buy commercial paper directly from firms; lend directly to non-financial companies shut off from normal credit; double the size of the TAF auctions to provide further liquidity to banks; pay interest to banks on reserves held at the Fed; and orchestrate a global rate cut. Many of these efforts still need to be fully implemented, but they are coming. Most important appears to be the idea of using some of the $700 bio rescue package to inject capital directly into banks (see below). Other central banks are taking similarly aggressive and proactive measures, including guaranteeing inter-bank lending and bank deposits, as well as making capital injections directly into banks. Additional measures are likely to be announced over the weekend, as the G7 and G20 are set to convene along with the IMF/World Bank regular meeting. Additionally, Eurozone leaders are set to meet in Paris on Sunday to develop Europe- specific policies to address banking sector strains. That leaves us still waiting for signs of concrete change rather than just relying on talk, which is what sent markets plummeting this week. Still, I think stocks are more likely to stabilize rather than continue to plunge, but that risk is still out there. I'll be keeping an eye on the same barometers of credit conditions outlined in last week's report. Of those, I would note that gold plunged today, despite fear remaining palpable.--Brian Dolan

Outlook for currencies during the turmoil
While we wait to see how government steps to stabilize the banking sector play out and how markets react, there are two main drivers in the Forex market. The first is fear and risk aversion, which characterized this week's price action. During such panic driven turmoil, the JPY strengthens across the board, and JPY-crosses (e.g. AUD/JPY, GBP/JPY, EUR/JPY and CAD/JPY) plunge. Such cross selling pressure weighs on other dollar pairs, sending GBP/USD, EUR/USD, and AUD/USD lower and this is frequently viewed as USD strength. As fear abates and stock indexes recover, the JPY is sold and the JPY-crosses move higher. The other main driver is, in fact, heightened demand for USD, and this stems from two main sources. First, as investors flee other asset classes, whether stocks or commodities, they seek the safest investments, primarily US Treasury securities, which require USD to purchase. The second source of USD demand stems from credit market demand for USD spilling into the currency market. When markets begin to stabilize and credit conditions start to normalize, I expect demand for USD to diminish rather abruptly. Hopefully, it's clear that more stable markets will lead to higher JPY-crosses and a lower USD. Lastly, there is economic data, which was completely overlooked in this past week. Next week, however, a trove of significant US data awaits, and it is not expected to be USD friendly.

While there are no guarantees that such stabilization will emerge, and traders will need to remain extremely flexible, I am optimistic that we have made a key low in the JPY-crosses and a likely peak in the USD. USD/JPY and the JPY-crosses show similar bottoming patterns on Friday's daily candlestick charts, namely 'stars' and 'hammers.' Reversal signals are less evident in other USD pairs, with the exception GBP/USD which presents a likely hammer. I would now look to start buying GBP/JPY, AUD/JPY and EUR/JPY on dips into lows seen this week. In the USD pairs, I would look to buy GBP/USD and EUR/USD on weakness into the 1.6850/6900 and 1.3250/3300 area, respectively. Strength over 1.7200 and 1.3550 likely signals those pairs are set to move directly higher.--Brian Dolan

The last best hope … direct capital infusions to banks
With the latest attempts to instill confidence in US financial markets (passage of the TARP and Fed rate cuts) failing miserably for now, the US Treasury may attempt direct capital infusions by potentially acquiring preferred stock in banks. Ostensibly, Treasury Secretary Paulson and some of his top aides are looking into this and may begin buying stakes in banks within the next few weeks.

With the TARP plan, the government wipes a bad asset (toxic mortgage) from the banks’ balance sheets but only adds to its capital if it pays more than what the bank has already marked that asset down to. This would then leave those banks in a position to seek capital from outside sources in order to bolster their balance sheet. In the case of the capital infusion, however, the banks’ balance sheets would be instantly repaired.

This would of course come at the expense of current shareholders, who would suffer dilution as a result of the government’s participation. However, the planned $200 billion infusion (using funds from the appropriated $700 billion in the TARP) would likely fully re-capitalize the US financial system. Credit market losses in the US are currently running at just over $380 billion, with only $220 billion in capital raised as an offset. This leaves a $160 billion gap that would be instantly filled with the proposed $200 billion infusion and would provide a good cushion to the system.

In terms of the credit markets, this should limit the counter party risk drastically as newly capitalized banks would be less likely to default. Credit spreads would come in from recently astronomical levels and capital would likely begin to flow more freely. This would in turn likely see the recent pessimism in the stock market reverse and send equities markedly higher. The G-7 members are purportedly throwing this idea around in terms of applying it in other countries as well, which would be a welcomed sign for global markets. –Jacob Oubina

Key data and events to watch next week
The US calendar next week is packed with top-tier economic data. Tuesday starts things off with the monthly budget statement. Wednesday has producer prices, retail sales and the NY Empire manufacturing index due up. Thursday is even busier with consumer prices, initial jobless claims, capital flows, industrial production, Philly Fed manufacturing index and the NAHB home builder confidence index. Housing starts, building permits and the University of Michigan sentiment index round out the week on Friday. There are also 11 Fed speakers next week with Fed Chairman Bernanke and Fed Vice Chairman Kohn on Wednesday as the highlights. Look for the Fed’s latest Beige Book on Wednesday as well.

The Euro-zone calendar is a touch less eventful. French business confidence, French consumer prices, Euro-zone ZEW, German ZEW and Euro-zone industrial production all kick off the week on Tuesday. Wednesday follows with German and Euro-zone consumer prices while Friday rounds out the week with the Euro-zone trade balance. ECB President Trichet is due to speak on Tuesday and German Finance Minister Steinbrueck is up on Thursday. Also look for an EU leaders’ summit on Wednesday.

Japan’s economic calendar is modestly busy and kicks off with domestic CGPI on Monday. Consumer confidence, the current account and trade balance are due on Tuesday. Wednesday has industrial production on tap while Thursday sees the tertiary industry index. Nationwide department store sales and a speech by the BOJ's Shirakawa close the week out on Friday.

The calendar in the UK is on the light side. Producer prices and RICS home prices start the action on Monday. Tuesday has retail and consumer prices due up while Wednesday has the all-important employment report on tap. Also watch for a speech by the BOE’s Sentance on Monday.

Canada is ultra light in terms of economic data with only manufacturing shipments on Thursday. The Canadian election will be the main focus on Tuesday, with Canadian Prime Minister Stephen Harper still leading in the polls.

It is relatively quiet down under as well. New Zealand retail sales kick off the week on Sunday evening. Tuesday then sees Australian business confidence. Wednesday has New Zealand business PMI and the Australian leading index on tap. Last but not least, look for Australian import and export prices on Friday. –Jacob Oubina

Government actions cloud the USD outlook

Government actions cloud the USD outlook
Oww! My head hurts. A lot has happened in the course of the past week and like many in the market I'm having some difficulty getting my head around what has happened and what it means going forward. The major news is clearly the US government plan to form a Resolution Trust Corporation (RTC)-like entity to absorb toxic MBS (mortgage backed securities) debt from financial firms' balance sheets. The focus here is on returning the US financial sector to some form of normalcy so it can resume supplying badly needed credit to the US economy, which is a good thing. Many details of the plan are yet to be revealed, not the least of which is the expected cost, which leaves many questions still open, and that is a bad thing. (For instance, how much more will banks need to write down when they off-load their troubled MBS debt, and what will that do to their capital reserves and ability to lend?) The details are expected to be ironed out over the weekend and in coming negotiations between Fed/Tsy/Congress next week, with a likely plan in place by the end of the week. In the meantime, I offer my preliminary thoughts on what recent developments mean for the USD and other currencies below.

The most recent effort by the US government to stabilize the financial sector, and by extension the housing market and Main Street economy, likely represents a final turning point in the sub-prime credit crisis that began well over a year ago. Looking ahead, these are clearly positive developments for the US economy and reinforce the case that the US will be able to avoid a recession in the current soft patch. But the implementation and impact of such measures will take time, probably months at least, to be realized. In the short-run, concerns over the explosion in US government liabilities that come with the RTC plan will likely weigh on USD sentiment. In the short-run, the greenback looks to have further room to fall in what is now shaping up to be a USD correction lower. In EUR/USD, the upside looks to be in play while prices hold above 1.4390 on a daily closing basis, with that level marked by the 21-day moving average and the Kijun line from daily Ichimoku charts. The upside sees key resistance at 1.4580 from the base of the weekly Ichimoku cloud, and channel resistance from a possible bear flag above at 1.4680/700, making the high-1.46/low-1.47 area a zone to consider re-establishing EUR/USD short positions.

If we step back and look at economic fundamentals, however, the outlook for the USD arguably just got a lot better. Between the takeover of Fannie/Freddie and now the RTC solution, mortgage and consumer credit are likely to be greasing the economy's wheels in the near future. Congressional leaders are also set to put forth a second economic stimulus package that could provide an additional boost, especially in job creation, into the end of the year. In contrast, governments outside of the US have been considerably less active in taking steps to support economic growth, even though many of their economies are likely already in recession (UK, Eurozone, Japan, Canada, and NZ). Also, interest rate spreads have narrowed in favor of the USD to levels last seen when the USD peaked on Sept. 11, removing a minor interest rate disadvantage since then. The fundamentals will eventually re-assert themselves and we'll need to watch the data closely. However, whereas the USD was able to shrug off weak/disappointing data during its rebound since mid-July, it's now more likely to experience a more even-handed reaction (falling on weak data/recovering on better news) during this period of correction.--Brian Dolan

Risk appetites return, for the moment
The most significant currency moves over the last two weeks took place in the JPY-crosses, the proxy for risk seeking/aversion in FX. JPY-crosses, like AUD/JPY and EUR/JPY, were pummeled lower as credit markets seized up and then rebounded as the latest, and hopefully final, US government initiative was announced. However, I am skeptical that this sudden return to risk-seeking behavior can be sustained. To say that the US or global outlooks remain uncertain would be a gross understatement. At the minimum, markets do not even have a handle on the large or fine print of the RTC bail-out package yet, and the numbers being discussed are alarming, not inspiring. Commodity prices are also showing indications of risk aversion remaining elevated, so I would caution traders not to get carried away with carry trades from current levels (e.g. EUR/JPY at 155). --Brian Dolan

Review of US government steps to stabilize markets
Government officials in the US enacted a few initiatives this week in an attempt to calm what was a tumultuous week for global markets. We highlight these measures below.

• Planned government facility to rid banks of toxic mortgage securities
From the scant details offered thus far, it seems the plan is basically for the US government to create a sort of super fund that will buy the distressed mortgage paper from the banks -- effectively removing the toxic assets from their balance sheets. Little else is known in terms of the extent of write-downs the participating banks will have to take upon the sale of such assets, or exactly what the government will do with the paper. One major brokerage recently sold most of its bad mortgage assets for roughly 20 cents on the dollar in an attempt to clean out its balance sheet, so there is definitely some precedent here in terms of pricing.
The ultimate cost of this bailout has been bandied about, with a plethora of estimates included. Treasury Secretary Paulson said flat out that the plan will cost US taxpayers “hundreds of billions” of dollars. Some members of Congress put the price tag of the bailout at $1 trillion and we’ve even seen some market economists’ estimates in the order of a whopping $3 trillion. When you consider that a handful of the major US banks held roughly $500 billion of these troubled “level 3” assets as of 2Q, this suggests the total holdings across the entire financial landscape are colossal. Thus the real cost of this measure could indeed surpass the $1 trillion mark. Congress will meet with Treasury and Fed officials over the weekend and we expect details to emerge shortly thereafter.

• Ban on short-selling financial equities
In an attempt to stem the declines in shares of US financial companies the Securities and Exchange Commission enacted a ban on short-selling shares of roughly 800 companies. The ban in the US is set to run through October 2nd while a longer-term measure in the UK (enacted a day earlier) bans short-selling of financials through the end of this year. This gives the financial sector some breathing room while the mortgage bailout is worked out, though it will be curious to see what happens once the US rules expire. The fact that many of these institutions will likely have to take write-downs on their sale of toxic mortgage assets to the government could see their share prices come under pressure once again.

• Backstop for money-market funds
The losses in financial stocks seeped into the assets of many money-market funds this week, leading to an exodus (~$90 billion) of cash as investors feared the worst. Fearing a classic “run on the banks”, the US Treasury pledged to insure investor losses in such funds through the next year. The Treasury will seemingly use an “emergency pool” of roughly $50 billion to backstop the losses. This added safety net could see a major influx of cash into these funds, where the rates of return are typically higher than those of risk-free assets. If this flood were to also come from overseas, it would be an overall positive for the buck.--Jacob Oubina

Key data and events to watch next week
The US data calendar is relatively light next week, but other more import events will be closely watched. All eyes will be on Treasury Secretary Paulson and Fed Chairman Bernanke as they testify on the credit turmoil on Tuesday before a Senate panel. Bernanke is up again on Wednesday testifying before the Congressional Joint Economic Committee. Thursday has Paulson and Bernanke together again, this time before a House panel where they will talk about the GSE takeovers. In data, the action kicks off on Wednesday with existing home sales. Thursday is busy with initial jobless claims, durable goods and new home sales due up. Friday rounds out the week with the final cut on 2Q GDP and the University of Michigan confidence survey.

It is a touch busier in the Euro-zone in terms of data. French consumer spending kicks things off on Tuesday, with PMIs for the Euro-zone also due up that day. Wednesday sees French business confidence, Euro-zone current account and the German IFO business climate survey. Germany’s all important GfK consumer confidence survey is up on Thursday. Friday closes out the week with German import prices, French consumer confidence and French final 2Q GDP. ECB speakers next week include Trichet on Monday, Stark on Wednesday and Bini Smaghi on Thursday.

In the UK it’s all about housing in a very light week. Rightmove home prices are on deck for Sunday night followed by home purchase loan data on Tuesday. On the speaking circuit we have the BOE’s Gieve on Monday, Sentance on Wednesday and Barker on Thursday.

Japan also sees a very light week. The all industry activity is up on Sunday evening and then we wait until Wednesday for the trade balance numbers. Thursday rounds out the week with consumer prices. BOJ board member Noda is scheduled to speak on Thursday as well.

Canada sees little action next week also, starting with retail sales on Monday. Tuesday sees consumer prices and Thursday has Bank of Canada Governor Carney on deck.

Last but not least, it is extremely quiet down under. New Zealand Westpac consumer confidence starts it all off on Wednesday. The RBA releases its Semi-Annual Financial Stability Review on Thursday with New Zealand GDP also up that day. Friday rounds out the week with Australian new home sales.--Jacob Oubina

US Dollar - Is This Reversal Just the Beginning of a Bigger Move?

US Dollar - Is This Reversal Just the Beginning of a Bigger Move?
The US dollar fell sharply across the majors on Friday as US retail sales and producer prices proved to be broadly bearish and unsupportive of speculation that the Federal Reserve is hawkish enough to consider raising interest rates before year end. US Advance Retail Sales fell more than expected by 0.3 percent in August, marking the second consecutive month of contraction. Looking at a breakdown of the index, spending in nearly every component declined, led by building materials, gasoline stations, and department stores. It is worth noting, though, that this index is not adjusted for inflation, so the drop in the gasoline station component may only be indicative of the drop in gas prices during August (rather than a drop in demand). Nevertheless, consumption is widely anticipated to be a soft spot for the US economy going forward, as the housing sector has yet to recover for some time, credit conditions remain tight, and the unemployment rate rises. In fact, during August, the unemployment rate surged to a 5-year high of 6.1 percent with non-farm payrolls contracted for the eighth consecutive month.

Looking at the other release on hand, US producer prices fell by the most in nearly 2-years during August, as the index tumbled 0.9 percent for the month and slowed to an annual pace of 9.6 percent from 9.8 percent. The decline was led, unsurprisingly, by energy as crude oil plummeted over the course of the survey period. However, excluding this fact, producer prices rose 0.2 percent during the month thanks to continued food cost increases. Overall, the data should quell some of the speculation that the Federal Reserve will move to raise rates before year end, as we actually saw that fed fund futures were pricing in a slight 14 percent chance of a 25bp cut at the next meeting on September 16. While this is highly unlikely, that sort of sentiment was just what dollar bears needed to get back in the game and this move could continue throughout next week, though much of that will depend on the Federal Reserve’s policy statement on Tuesday and what sort of bias it reflects.

British Pound Rockets 2% Higher, More Gains May Be In Store
There was no UK data on hand on Friday, but if there had been, it probably would’ve been disappointing. Indeed, there’s no doubt in anyone’s mind that the Bank of England is in a very tough spot at this juncture, as the UK economy teeters on the brink of recession while inflation pressures remain strong. That doesn’t mean the British pound can’t gain in these circumstances though. It took a few days, but my DailyFX Analyst Pick from Monday is finally working out, as GBP/USD rocketed higher on Friday as the overextended decline in the pair finally started to correct. According to the latest FXCM SSI numbers, GBP/USD shorts jumped 16 percent, and as a contrarian indicator, the data signals additional gains. While my bias for the British pound remains bullish for much of next week, the currency faces hefty event risk. On Tuesday, UK CPI is expected to accelerate even faster to a 4.6 percent annual pace, which would mark the sharpest rise since May 1992. On Wednesday, the Bank of England’s meeting minutes - a huge market-mover for the British pound – will hit the wires and could show yet another split vote and biased commentary. Finally, on Thursday, UK retail sales are forecasted to fall 0.5 percent, dragging the annual rate to a more than two year low of 1.6 percent and adding to the pile of evidence signaling a potential recession.

Euro Rallies 200+ Points, Breaks Trendline Resistance
The Euro rallied extended 2.3 percent higher against the Japanese yen and 1.6 percent versus the US dollar as the oversold currency finally reversed. In fact, looking at recent FXCM SSI readings, EUR/USD positioning flipped from net long to net short on Friday, and as a contrarian indicator suggests the pair could gain further. However, there is still quite a bit of rate cut speculation, as Credit Suisse overnight index swaps are now pricing in nearly 50bps in reductions by the ECB over the next 12 months, compared to 25bps in cuts just two weeks ago. Thus, from an interest rate perspective there’s still downside risk for the euro, and there is notable resistance looming above at the 38.2% fib of 1.4812 – 1.3880 at 1.4236. While I do see potential for EUR/USD to pullback when trading resumes on Sunday, my bias for the euro remains bullish for much of next week.

Japanese Yen: The Only Currency Weaker Than the US Dollar
Like the US dollar, the Japanese yen tumbled across the majors, but losses for the low-yielding yen were hefty as the currency lost nearly 3 percent against high-yielders like the British pound and Australian dollar. The move had more to do with sharp reversals in oversold currencies like the Euro and British pound, but with the Japanese Yen interest rate forecast looking neutral, the currency will be particularly vulnerable to choppy price action. Meanwhile, Japanese data was extremely weak overnight as the final revision of Q2 GDP confirmed that the world’s second-largest economy shrank 0.7 percent during the quarter and contracted 3 percent from a year earlier. Since Q1 GDP fell 0.6 percent, Japan is now officially in recession (strict definitions of recession refer to two consecutive quarters of negative economic growth). As a result, the Bank of Japan will likely stick to a loose monetary policy by keeping borrowing costs unchanged at 0.50 percent through the next year, though BOJ Governor Shirakawa’s scheduled speech late next week could yield some bearish commentary on the economy.

US Dollar Remains Overbought - Prone to Reversal?

US Dollar Remains Overbought - Prone to Reversal?
Indeed, according to COT forex positioning, the dollar is extremely overbought, suggesting we may be nearing a point where risk/reward warrants selling the greenback. We’ve seen some incredibly volatility in the currency, as the EUR/USD and GBP/USD pairs traded in more than 100 pip ranges. When it comes down to it though, the dollar still ended Tuesday up very slightly versus most of the majors (though it fell against the Japanese yen). Looking at the economic data on hand, US pending home sales fell 3.2 percent, as fewer Americans signed contracts to buy homes. Such a decline is not incredibly surprising, as demand for homes remains extremely weak given the US economic slowdown and more stringent lending standards. Meanwhile, wholesale inventories rocketed 1.4 percent in July while wholesales sales slipped 0.3 percent, suggesting that lackluster demand is leaving firms stuck with excess supplies. This does not bode well for this Friday’s advance retail sales release, especially given the continued deterioration in the US labor markets as indicated by last week’s US non-farm payrolls (NFPs) report.

Japanese Yen the Currency of Choice as Increase in Investor Confidence Proves Short-Lived
Monday’s surge in carry trades and the Japanese yen crosses subsequently saw a sharp reversal on Tuesday, as the increase in investor confidence following the US government’s seizure of Fannie Mae and Freddie Mac proved to be short-lived. Indeed, the DJIA – which gained 2.58 percent on Monday – plunged 2.43 percent on Tuesday, as 11,500 provided solid resistance. Meanwhile, the Japanese yen gained over 1 percent versus the Euro, British pound, and US dollar while jumping nearly 2 percent against the New Zealand dollar and 3 percent against the Australian dollar. As usual, Japanese fundamentals has little bearing on the currency, as the latest forex correlations report shows that carry trades and the DJIA have increasingly been moving in lockstep (though the correlation is not as high as it was in 2007). Going forward, the Japanese yen will continue to depend on the status of risk appetite in the market, and the evolution of the Fannie Mae/Freddie Mac story will certainly be one worth following.

British Pound Creeps Higher Despite Weak UK Data – Time to Buy?
The British pound climbed throughout the trading day following Monday’s test of 1.75 as COT forex positioning shows that the currency remains oversold and other indicators suggest potential GBP/USD buying opportunities. However, UK economic data remains overwhelmingly bearish, as UK industrial production failed to rise for the fifth consecutive month in July as mining, quarrying, oil, and gas output drops. The news comes on the tails over yesterday’s weaker-than-expected producer price numbers, which indicated that the Bank of England may be able to let their guard down sooner rather than later when it comes to inflation risks, especially since the central bank is already grappling with the issue of a rapidly deteriorating economy. This is much of the reason why Credit Suisse overnight index swaps are pricing in nearly 100bps worth of rate cuts by the Bank of England over the next 12 months, and if the official UK CPI numbers (due to be released on 9/16) signal that inflation is not accelerating as quickly as they expected, the central bank could start reducing interest rates before year-end. Thus, from a fundamental perspective, downside risks remain for the British pound, but from a technical perspective, I believe GBP/USD is due for a bounce from current levels.

Euro: Why the ECB Will Not Cut Rates Until 2009
The euro consolidated above 1.41 towards the end of the US trading session on Tuesday, as the US dollar remains relatively strong across the majors, but like the British pound, there are technical indications that EUR/USD could advance. Meanwhile, from a fundamental perspective, much of the EUR/USD decline has been due to speculation that the European Central Bank will cut rates while the Federal Reserve will hike. Last week, we saw the ECB leave rates unchanged at 4.25 percent, and as expected, ECB President Trichet remained hawkish on inflation and somewhat bearish on economic prospects, especially since ECB staff projections for growth were revised down for 2008 and 2009. Overall, though, ECB voting members remain focused on their primary mandate of price stability, suggesting the 25-50bps worth of cuts expected during the next 12 months will not occur until 2009. If this starts to become clear to the markets, the euro may finally have the fundamental impetus to recover.

Australian Dollar, New Zealand Dollar Hit Hard By Risk Aversion – Will the RBNZ Cut Rates?
The Australian dollar and New Zealand dollar both tumbled on Tuesday amidst a return to risk aversion, as carry trades throughout the financial markets experienced a sharp reversal. Economic news was limited, though Australian retail sales did edge slightly higher during the month of July. In a new monthly trend series, the government reported a 0.1 percent gain, matching the June reading. However, this report may now be less reliable since it takes into account a significantly smaller sample size, and will make it a bit more difficult for policy makers to gauge consumer spending, which accounts for approximately 60 percent of economic growth. The biggest piece of event risk by far, though, will be the Reserve Bank of New Zealand’s rate decision, since they are expected to cut rates for the second consecutive month by 25bps to 7.75 percent, according to 14 of the 15 economists polled by Bloomberg News. It is telling, though, that the last economist actually anticipates a 50bps cut. The key to the New Zealand dollar’s reaction, though, will be RBNZ Governor Bollard’s post-meeting commentary. Credit Suisse overnight index swaps are already pricing in nearly 150bps worth of rate cuts within the next 12 months, but if Mr. Bollard mimics his dovish policy statement from July, this sentiment will be exacerbated and the New Zealand dollar will likely plunge.

US Dollar Gets a Boost from Fannie/Freddie Intervention…For Now

US Dollar Gets a Boost from Fannie/Freddie Intervention…For Now
Indeed, many have taken the intervention as the answer for the ailing US housing sector and financial markets. While the operation of Fannie Mae and Freddie Mac is good for the trading of mortgage-backed securities, in that there will be a party willing to buy the risky assets, it does not mean the values of them will improve. In order for these values to rise, US property values will need to increase first and there is no single solution for this. In reality, another major factor working against a recovery in housing is the slowing in the broad US economy, especially given last week’s worse-than-expected labor market reports. US non-farm payrolls (NFPs) fell 84,000, marking the eighth consecutive month of job losses in August, while the unemployment rate picked up to a 5-year high of 6.1 percent. Nevertheless, Credit Swiss overnight index swaps (OIS) are still pricing in over 50bps worth of hikes by the Federal Reserve within the next 12 months as the Federal Open Market Committee said during their last meeting that "the next policy move would likely be a tightening," though they did specify that any changes would "depend on evolving economic and financial developments.” Overall, I think this US dollar rally stemming from the Fannie/Freddie news is one to be leery of, and given the vastly overbought nature of the currency, we may be nearing a point where risk/reward warrants selling the greenback.

Japanese Yen Falters as Traders Return to Carry Trades
In the aftermath of the news of the US government’s seizure of Fannie Mae and Freddie Mac, the US dollar wasn’t the only currency to react strongly. Indeed, the Japanese yen finally pulled back against many of the majors, especially the high-yielding New Zealand dollar and Australian dollar, as traders saw the announcement as a green light to pile into carry trades. However, as we mentioned in our discussion of the US dollar, traders should be leery of these moves as the ultimate benefits of the GSE bailout (Government Sponsored Enterprise) may be limited for the financial markets and US housing sector. In Japanese economic news, the Eco Watchers survey of business conditions fell to a nearly 7-year low of 28.3 from 29.3. With wage growth slowing and the Japanese economy on the brink of recession, it is unsurprising to see that businesses are less optimistic about their prospects going forward. Nevertheless, this news really had little bearing on Japanese yen price action, as our latest forex correlations report shows that carry trades and the DJIA have increasingly been moving in lockstep (though the correlation is not as high as it was in 2007). Going forward, the Japanese yen will continue to depend on the status of risk appetite in the market, and the evolution of the Fannie Mae/Freddie Mac story will certainly be one worth following.

British Pound Experiences Heavy Volatility Trading in Massive 500 Point Range
Trading in the British pound had more to do with US dollar price action, but the moves were notable nonetheless. GBP/USD managed to trade in a nearly 500 point range of approximately 1.75 – 1.80, but ultimately ended the day by consolidating in a smaller range of 1.7550 - 1.7625. Looking at the data on hand, the UK producer price index reflected declines in both input and output prices during the month of August, as the former fell 2.0 percent and the latter slipped 0.6 percent, marking the sharpest drop since record-keeping began in 1986. The declines were due primarily to a reported 4.8 percent plunge in petroleum product prices, but energy was not the sole factor as even core output prices slipped 0.1 percent. Overall, the data suggests that the Bank of England may be able to let their guard down sooner rather than later when it comes to inflation risks, especially since the central bank is already grappling with the issue of a rapidly deteriorating economy. This is much of the reason why Credit Suisse overnight index swaps are pricing in nearly 100bps worth of rate cuts by the Bank of England over the next 12 months, and if the official UK CPI numbers (due to be released on 9/16) signal that inflation is not accelerating as quickly as they expected, the central bank could start reducing interest rates before year-end. Thus, from a fundamental perspective, downside risks remain for the British pound. However, the currency is also greatly oversold.

Euro Ends Day Down Nearly 300 Points From Intraday High
The euro collapsed 300 points from the intraday high during the European and US trading sessions to end the day near 1.4150 as investors bought up risky assets and signaled confidence in US assets. There was no European data on hand, but there was central bank commentary on hand that would normally provide a bullish spark for the euro. Indeed, European Central Bank Executive Board member Juergen Stark noted the materialization of “second-round” inflation effects from energy and food prices, saying that wages were rising at “annual rates Fnot seen since the mid-1990s.” The ECB has frequently cited a need to maintain price stability so as to avoid these “second-round effects,” and as a result, it is clear that the central bank will not even consider cutting rates anytime soon. While Credit Suisse overnight index swaps may be pricing in over 25bps worth of cuts within the next 12 months, I do not expect the ECB to do so until Q4 2008 or early 2009. Furthermore, like the British pound, the euro remains extremely oversold and there are indications that EUR/USD could advance.

Australian Dollar, New Zealand Dollar Surge on Demand For Yield
The Australian dollar and New Zealand dollar both surged on Monday thanks to a new-found demand for risky, high-yielding assets. While the Reserve Bank of Australia and Reserve Bank of New Zealand are both expected to cut rates by at least 100bps over the next 12 months, the central banks still hold some of the highest benchmarks in the G10 (RBA: 7.00 percent, RBNZ: 8:00 percent). However, commodity prices – which hold a strong correlation with the Aussie – ended the day very little changed. Traders shouldn’t brush off that correlation though. If the market’s attention turns away from Fannie Mae/Freddie Mac and back to commodities, oil and gold could become the big driver of the commodity dollars once again. Meanwhile, event risk will pick up significantly for the comm bloc this week. The biggest by far will be the Reserve Bank of New Zealand’s rate decision, since they are expected to cut rates for the second consecutive month by 25bps to 7.75 percent, according to 13 of the 14 economists polled by Bloomberg News. It is telling, though, that the last economist actually anticipates a 50bps cut. The key to the New Zealand dollar’s reaction, though, will be RBNZ Governor Bollard’s post-meeting commentary. Credit Suisse overnight index swaps are already pricing in nearly 150bps worth of rate cuts within the next 12 months, but if Mr. Bollard mimics his dovish policy statement from July, this sentiment will be exacerbated and the New Zealand dollar will likely plunge. Meanwhile, New Zealand retail sales, Australian retail sales, and the Australian net employment change are all likely to be negative fundamental factors for Kiwi and Aussie.

The USD surge continues; no end in sight

The USD surge continues; no end in sight
So much for the period of consolidation I was expecting last week. The USD surge has continued and the persistence of USD price gains remains as forceful as the early phase of the USD rebound. Price action continues to point to massive position liquidations, as USD pullbacks remain exceptionally shallow and new highs occur with little seeming relationship to data releases or other time-specific events. In simpler terms, asset managers are still looking to unload long EUR, GBP, AUD positions and ultimately get short those currencies, preferably on bounces in those pairs. When better levels to sell at fail to materialize, these funds are forced to go to market and sell into weakness at successively lower levels.

Many analysts are continuing to look for some slowing to the USD rally or some consolidation to develop and I fell into that trap last week. Instead of trying to anticipate a bottom in EUR/USD or a top in the USD, I'm going to operate on the basis of "I'll know it when I see it." And right now, I'm seeing very little in the way of signs of a USD top. The best that I can see are some doji patterns on daily candlesticks from Friday in the US dollar index and USD/JPY. But doji patterns (where the daily open is nearly identical to the daily close) are neutral and only potential warning signs of a reversal; traders need to wait for confirmation signaled by a daily close beyond the doji extreme point in the opposite direction of the trend. For example, in the USD index, the trend has been up, so a daily close below the low of the doji candle could confirm a reversal.

Key inter-market relationships continue to support the USD advance, which in turn reinforces some of those markets' moves. Oil prices are below the 200-day moving average at 111.51 and remain at risk of dropping below the $105/bbl level, setting up potential to take out the psychologically significant level of $100/bbl and decline further. Gold has dropped back below the daily Tenkan line (fastest moving line) in daily Ichimoku charts and is closing below the cloud on weekly Ichimoku charts, highlighting the prospect of more significant declines ahead. US Treasuries were bought on flight-to-quality desperation as asset managers dumped overseas assets and looked to park money in the most secure bond available. Also, this past week saw significant market talk that hedge funds were paring asset holdings in anticipation of large redemptions, a Street euphemism for withdrawals, for the September quarter end. It seems unlikely that such asset sales have already run their course in the first week of September and I would expect more to come.--Brian Dolan

New levels to watch in EUR, GBP, and AUD
In last week's update, I highlighted key levels to watch in EUR/USD, GBP/USD and AUD/USD for signs that further declines were unfolding. In each pair, those key levels were broken and the targeted declines were met or exceeded. Below are snapshots of those same currency pairs with new levels to watch.

• EUR/USD: Broke below the key 1.4500/50 level and losses exceeded my projected target of 1.4300. Importantly, EUR/USD is closing below weekly trendline support at 1.4470/80, marking that area as the new 'sell on rally' level. The 100-week moving average at 1.4192 looks to have contained the downside for the time being and a break below that level will likely trigger further weakness to the 1.4000/50 zone of round-number, psychological support. Below sees even longer-term weekly trendline support at 1.3850/70. Additionally, EUR/USD is closing below 1.4358, which is the 38.2% retracement of the move higher from Nov. 2005 lows at 1.1640 to the recent all-time highs at 1.6038. The close below the 38.2% level ultimately targets a drop to the 61.8% retracement at 1.3319, but the 50% level (1.3838) happens to coincide with weekly trendline support at 1.3850/70, so that level may prove more significant as support.

• GBP/USD: Collapsed below the supports I highlighted last week and reached the measured move objective from the 'head and shoulders' pattern at 1.7530 (Friday's low was 1.7538). Cable is below any moving average or retracement you would care to think of. The next downside objective is simply a zone of support between 1.7200/80. This area is marked by trendline support off lows from late 2005/early 2006 and a symmetrical decline equivalent to the drop from 1.9750 to 1.8520, which would target 1.7280. The 1.7850/7900 area is key trendline resistance that offers potential selling levels.

• AUD/USD: Succumbed below 0.8500 and exceeded my projections to 0.8280 and nearly reached the next target at 0.8000 (Friday's low was about 0.8030). Perhaps significantly, AUD/USD is closing above the 200-week moving average at 0.8090. Also, Fibonacci support comes in at 0.8103 (61.8% retracement of the rise from March 2006 low of 0.7016 to the recent all-time high at 0.9861), making this area the trigger to a likely decline below 0.8000. Weakness below these levels likely signals further declines to the spike low of August 2007 around 0.7680 next. Key trendline resistance in the 0.8300/30 area offers potential selling opportunities.--Brian Dolan

Expect some Kiwi volatility with RBNZ on deck
Before I get to the RBNZ outlook, beware that RBA Governor Stevens is set to give his semiannual economic testimony on Sunday evening at 2300GMT and his comments could have significant spillover impact on Kiwi. Now, the Reserve Bank of New Zealand is due to announce next Wednesday at 2100GMT and the market expectation is that the bank will reduce the benchmark interest rate by -25bp to the 7.75% level. We agree with the market outlook but would also note the risk that the bank decides to cut a more aggressive -50bp in an attempt to nip the economic slowdown in the bud. Retail sales have slowed to an annual rate of just 2.4% in 2Q08 after running at 6.5% last year. Meanwhile, the housing market remains in the dumps and this is weighing heavily on consumer confidence. The Westpac Banking consumer confidence index plunged to 81.7 in 2Q from 96.5, to the lowest level since September 1991. Inflation does remain high at 4.0%, though this still leaves the real benchmark interest rate well in positive terrain and gives the RBNZ a great deal of room to take rates lower at a relatively quick pace. One way or the other, we expect some good price action in Kiwi to result.

Technically Kiwi looks poised for further downside. Indeed NZD/USD looks to have formed a classic hourly bear flag pattern. The 0.6880/0.6580 flagpole suggests a 300 pip measured move objective on a break below channel support (currently ~0.6630), with weakness towards the 0.6350/30 area. That said the pair looks likely to find support at the 0.6530/20 area initially, which is around the daily close back in late September 2006 -- right before Kiwi’s long-term move higher. We would expect this area will be firmly in play if the RBNZ surprises the market with a -50bp cut. The risk to the upside would come from a -25bp cut coupled with a relatively hawkish statement which focuses on inflation risks and tones down the risks to economic growth. Though unlikely, this scenario should see NZD/USD make a try for 0.6750 initially, with further upside to 0.6800 next. Stay tuned! --Jacob Oubina

Hurricanes and 9/11 anniversary may roil markets
Besides the usual key economic data reports next week, the market is also likely to be keenly focused on the hurricane activity in the Atlantic. While Hanna is set to dissipate over the weekend, Ike still looms as a present danger. Projections are that the Ike will end up anywhere from the east coast of Florida to the Gulf by Wednesday morning. The forecast is that by then the hurricane will still be a very potent category 3 storm with roughly 115mph winds. The key for oil prices will be whether the storm does indeed make a move towards the Gulf where it has the potential to impact oil production facilities. If such a risk becomes highly probable, this should send oil prices rocketing higher towards $111.50 initially and $117.00 on the follow. Should Ike avoid the Gulf, look for oil prices to breathe another sigh of relief and test lower.

The anniversary of the September 11, 2001 terrorist attacks could also add some extra volatility to markets as terrorist organizations in the past have used this day to release threatening statements. While statements of the sort would eventually be shrugged off, the potential still exists that such an event could create some extra market uncertainty. --Jacob Oubina

Key data and events to watch next week
The US data calendar is pretty heavy next week with pending home sales and wholesale inventories kicking things off on Tuesday. Thursday has the usual initial jobless claims along with the trade balance and import prices due up. Friday is a big top-tier data day with producer prices and retail sales the highlights. Also released will be the University of Michigan consumer sentiment index and business inventories. Fed speakers next week include Fisher on Monday, Bernanke on Tuesday and Kohn on Thursday.

The Euro-zone will see only a handful of data reports but has a busy week lined up nonetheless. The German trade balance starts off the action on Tuesday. Wednesday has French industrial production and French trade on deck. Thursday sees German wholesale prices and French nonfarm payrolls while Friday has French business sentiment, French CPI and Euro-zone employment. ECB speakers abound next week with Stark on Monday, Weber and Mersch on Wednesday and Trichet on both Thursday and Friday. The European Commission is set to release economic growth forecasts on Wednesday and it looks like they will be reducing expectations on this front. Lastly, Euro-zone Finance Ministers are due to meet on Friday. Expect this group to highlight economic growth risks more than upside risks to inflation.

Japan has a relatively light week coming up. The Eco Watchers consumer sentiment survey kicks off the week on Monday. Tuesday is busier with machine tool orders, domestic corporate goods prices, current account and trade balance all due. The leading index is scheduled for Wednesday while Thursday has the 2Q final GDP read. Friday rounds out the week with industrial production data.

The UK calendar sees modest action as well. Monday starts with producer prices and the BRC retail sales monitor. Tuesday has industrial production while Wednesday has trade balance data. The Bank of England releases the quarterly inflation attitudes survey on Friday. Finally, Friday also has several Bank of England MPC members due to testify before Parliament and they are likely to be grilled.

Canada’s calendar is characteristically light with building permits starting things off on Monday. Housing starts are on tap for Tuesday and productivity data is due on Wednesday. Thursday rounds out the data week with international trade and new home prices. Finance Minister Flaherty is due to speak on Wednesday as well.

The data calendar down under has a plethora of data coming up. Sunday starts things off with RBA Governor Stevens giving the semiannual economic testimony and New Zealand home price data. Tuesday follows things up with Australian business confidence and New Zealand trade. On Wednesday we have Australian consumer confidence and the RBNZ rate decision. Thursday rounds out the week with Australian employment, New Zealand business PMI and New Zealand retail sales. --Jacob Oubina

US Dollar: What Impact Will Non-Farm Payrolls Have?

US Dollar: What Impact Will Non-Farm Payrolls Have?
Working in favor of US dollar strength was the release of ISM services unexpectedly improved in August to a reading of 50.6 from 49.5, with the rise above 50 signaling an expansion in the sector for the first time since May. A breakdown of the report, though, suggests that the headline reading may be a bit deceiving. While price growth appears to be slowing, domestic and export orders both continue to contract, as those indexes held below 50. Furthermore, the employment component slipped to 45.4, signaling weakening labor conditions for the fourth consecutive month. This certainly does not bode well for Friday’s US non-farm payrolls (NFPs) report, which is anticipated to show 75,000 job losses. However, the NFP report has not been the huge market-mover it once was for the greenback, and may have little bearing on whether or not the currency continues to gain or fails.

Japanese Yen Gains Over 2.5% Against High-Yielders on Fears of ‘Financial Tsunami’
We know that risk sentiment remains the primary driver of the Japanese yen because political turmoil has recently emerged and Japanese economic data has been absolutely abysmal, but yet the low-yielding currency has remained strong against its foreign counterparts. This remains the case, as the currency gained across the majors, but especially so against the high-yielding Kiwi and Aussie dollars. What gives? With global credit risks remaining high and equity markets susceptible to sharp decline, traders deleveraging and pulling money out of carry trades. Furthermore, calls by PIMCO manager Bill Gross for the US government to bail out mortgage lenders like Fannie Mae and Freddie Mac rattled investor confidence, as he suggested lack of action would lead to a “financial tsunami.” Downside potential remains for the credit and equity markets, and as a result, my bias for the Japanese yen going forward versus most of the majors: bullish.

Canadian Dollar: Canada’s NFPs to Determine Next Move For USD/CAD
Yesterday I said that, from a technical perspective, it appears that commodity currencies like the Canadian dollar, Australian dollar, and New Zealand dollar may all be due to recoup some of their massive losses. However, at the end of Thursday’s trading session, AUD/USD and NZD/USD broke below former trendline support, while USD/CAD breach falling trendline resistance dating back to mid-2004. Looking ahead to Friday, the Canadian dollar will be the only commodity currency to face event risk, but it could actually prove to be the news of the day. The Canadian net employment change is forecasted to rise 10K in August compared to drop of 55.2K in July, while the unemployment rate is anticipated to edge up to 6.2 percent. The employment change is notoriously difficult to predict, especially since our main leading indicator for this – the employment component of Ivey PMI – will not be released until later in the morning. As a result, the data should be especially market-moving, with a strong reading likely to push USD/CAD lower, though a disappointing negative result should send the pair surging above noted trendline resistance.

Euro Breaks Below Key Support as Comments by ECB’s Trichet Stay Status Quo
The euro fell nearly 1 percent on Thursday, as EUR/USD tumbled and broke below the 38.2 percent fib of 1.1638 – 1.6041 at 1.4358. This was important as it also marks the region where we have the December 2007 lows, which could make it difficult for the pair to drop much lower. The European Central Bank’s rate decision was essentially a non-event, as they opted to leave rates steady at 4.25 percent as expected and ECB President Jean-Claude Trichet’s post-meeting press conference yielded little no information. Mr. Trichet maintained that inflation will likely remain “well above” their 2 percent target for a “protracted period of time,” and that current interest rates will help the ECB maintain their primary objective of price stability. However, ECB staff projections for real GDP growth were revised down to a range between 1.1 percent and 1.7 percent in 2008 and between 0.6 percent and 1.8 percent in 2009. Furthermore, risks to the outlook were noted as being “particularly high”, with downside risks prevailing. Overall, this was supportive of interest rate expectations, as Credit Suisse overnight index swaps price in over 25bps worth of cuts by the ECB during the next 12 months. On Friday, the status of the euro will depend greatly on the US dollar, as there are no key European economic releases scheduled.

British Pound Collapse Continues As House Prices Plunge 10.9%, BOE Leaves Rates Steady
The British pound has plunged nearly 2,500 points since mid-July, and ended Thursday testing 1.7575 as the outlook for the UK remains grim. The Bank of England’s rate decision was essentially a non-event, as the left rates at 5.00 percent and did not issue a monetary policy statement (since there was no change in rates). Nevertheless, Credit Suisse overnight index swaps are still pricing in nearly 100bps in rate cuts by the BOE within the next 12 months, as HBOS house prices fell 10.9 percent in August from a year earlier. The UK housing market remains in shambles, with the sector’s recession rivaling that of the US. The fear amongst UK central bankers is that it will have a similar impact on not only the economy at large, but also the credit markets.

ECB President Trichet’s Comments Could Shake Up the Markets, Expected to Leave Rates At 4.25%

Euro: ECB President Trichet’s Comments Could Shake Up the Markets, Expected to Leave Rates At 4.25%
Euro-zone retail sales fell more than expected by 0.4 percent in July. Nevertheless, the key to the euro this week will almost certainly be the European Central Bank’s policy meeting. They are widely anticipated to leave rates steady at 4.25 percent, but as usual, ECB President Trichet should be the bigger market-mover as his commentary tends to be biased and direct. In fact, the latest EUR/USD bear leg was sparked by his comments on August 7, as he turned his attention away from inflation to slowing growth. Since the ECB’s last meeting, evidence continued to point toward a sharp economic slowdown, while CPI estimates for August unexpectedly slipped to an annualized rate of 3.8 percent, down from the official July reading of 4.0 percent. That said, CPI is still well above the ECB’s 2 percent target. The news is in line with Credit Suisse overnight index swaps, which are pricing in just over 25bps worth of rate cuts within the next 12 months. In the end though, Mr. Trichet’s comments could prove to be a non-event, as his stance in unlikely to shift dramatically from last month.

US Dollar Rally Shows Signs of Pausing, ISM Serves Expected To Signal Contraction
The US dollar may have ended the day higher against many of the majors, but there are indications that the tide may be turning for the greenback. First, the plunge in crude oil futures - which has supported much of the dollar’s gains - has started to cool down. Next, Credit Suisse overnight index swaps, which priced in 62bps worth of Federal Reserve rate hikes over the next 12 months on Tuesday, have backed off to price in 49bps as of Wednesday’s close. US economic news proved to be a non-event, as the Fed’s Beige Book was similar to previous releases, noting that consumer spending is weakening while price pressures remain an issue for most industries. Thursday’s US data, however, should be a bit more market-moving with ISM non-manufacturing (services) scheduled to be released. This figure has held below the critical 50 level – signaling contraction – during 5 of the past 7 survey periods, and unfortunately for dollar bulls, ISM services is anticipated to hold at 49.5 in August. The key to the currency’s reaction, though, is where the index stands relative to 50, as a push above there could trigger another rally for the greenback while a sharper contraction could spark dollar sell-offs. The other factor to watch is the employment component, as this tends to be a good leading indicator for Friday’s US non-farm payrolls. My fundamental bias for the US dollar through the end of the week: bearish. I do think the ECB and BOE rate decisions bear watching though. As we saw last month, ECB President Trichet’s comments can spark wild volatility market-wide.

British Pound Awaits BOE Rate Decision – Will They Consider Cutting Rates?
The British pound ended the day slightly lower versus the US dollar, and is down almost 2.5 percent from last week’s close. There was no data on hand today, but bearish sentiment on the currency is proving hard to shake, especially since Credit Suisse overnight index swaps are pricing in almost 100bps worth of cuts within the next 12 months. While the Bank of England is widely anticipated to leave rates unchanged at 5.00 percent on Thursday, I think there is some potential for a surprise rate cut. Commentary by Bank of England policy makers and government officials suggests that many are truly worried that the UK is headed for recession, and it’ll be worth watching to see of MPC member David Blanchflower will remain the lone dove of the group, or if the sharp economic slowdown will convince others to vote for a reduction in the Bank Rate as well. Unfortunately, if the central bank leaves rates unchanged, no policy statement will be released and traders will have to await the release of the minutes from the meeting on September 17 for a glimpse at the vote count.

Commodity Dollars Ready to Rebound? Bank of Canada Leaves Rates at 3.00%
From a technical perspective, it appears that commodity currencies like the Canadian dollar, Australian dollar, and New Zealand dollar may all be due to recoup some of their massive losses. Indeed, AUD/USD has run into trendline support going back to 3/2006, NZD/USD has held up above a rising trendline going back to late 2001, and USD/CAD has backed off from falling trendline resistance going back to mid-2004. Likewise, the plunge in commodities may be slowing down, as WTI crude oil futures were down as much as $2.50 on Wednesday, but ended the day down $0.35 at $109.38/bbl, right near the 200 SMA. From a fundamental perspective, the only real contributing forex market-mover was the Bank of Canada’s rate decision. While they did not change the Bank Rate from its current level of 3.00 percent, the Bank’s Governing Council said that rates are "appropriately accommodative," suggesting that they had no intention of even considering reducing rates. This runs counter to Credit Suisse overnight index swaps, which are pricing in approximately 50bps worth of cuts within the next 12 months, and explains why the Canadian dollar rallied on the news. In the next 24 hours, there is little event risk on hand for the Loonie, Aussie, and Kiwi, but given technical factors my bias is for the commodity dollars to recover further through the end of the week.

Japanese Yen Strong Against High Yielders As Carry Trades Sell-Off
We know that risk sentiment remains the primary driver of the Japanese yen because political turmoil has recently emerged and Japanese economic data has been absolutely abysmal, but yet the low-yielding currency has remained strong against its foreign counterparts. This remains the case, as the currency gained across the majors, but especially so against the high-yielding Kiwi and Aussie dollars. What gives? With global credit risks remaining high and equity markets susceptible to sharp decline, traders aren’t rushing to pile into the carry trade quite yet. My bias for the Japanese yen going forward versus most of the majors: bullish.

USD consolidating for now; key levels to watch

USD consolidating for now; key levels to watch
The USD largely consolidated its recent gains this week, but not before making marginal new highs against the most beleaguered currencies (EUR, GBP, and AUD). Data continued to come in showing further deterioration in both current conditions and future outlooks in the UK and Europe. In contrast, US data continued to come in mostly better than expected (existing homes sales, consumer confidence, durable goods, 2Q GDP, and Chicago PMI all beat expectations). This is a theme we have been following for several months now, and it finally seems to have taken hold among analysts in the broader market. In contrarian thinking, that would suggest the bulk of the USD's moves are done for the time being. But I'll argue later that this is most likely simply a period of consolidation that will be followed by further USD gains. In the meantime, traders need to be prepared for more consolidation and relatively choppy conditions, subject to key levels I'll outline next.

• In EUR/USD, the intra-week low at 1.4570 effectively achieved the 'measured move' target indicated by the double-top pattern from just above 1.6000. Depending how one measures the distance between the neckline and the double top, as well as the level of the neckline itself, the pattern indicated a 'measured move' objective of about 750 points, making 1.4540 the target. Last week's low effectively hit that target and subsequently prices began to correct. The 1.4500/50 area is an obvious 'round number', psychological source of support and it's not surprising that EUR/USD should hesitate on its first attempt down there. Weakness below 1.4500 will signal further declines to the 1.4300/50 area initially, and then target 1.4000 next. The 1.4850-1.4950 area remains the level to establish new short positions.

• In GBP/USD, what looks to be unfolding is the fallout from a rather gnarly looking 'head and shoulders' top. The neckline was broken with the drop under 1.9400 and targets a 'measured move' objective of 1,870 points to 1.7530. Cable is currently probing daily closing low support at 1.8160/70 from June of 2006, and once that level is broken, I would expect losses to quickly extend to 1.8000, which looks likely to fall like a house of cards, opening the way to the 1.7500/50 target area. The 1.85-1.86 area is the dream level to re-sell on any correction.

• AUD/USD has also reached a significant support level that is likely to lead to a period of consolidation. The past week's intra-day low was just below 0.8500, another 'round number' source of psychological support. 0.8508 is also the 61.8% Fibonacci retracement level for the move up from the 0.7676 spike low just over a year ago to the all-time high at 0.9850. A daily close below 0.8500/08 should signal further weakness initially to the 0.8280/0.8320 area, marked by a major low from Sept. 2007, but ultimately weakness toward 0.8000 is expected. 0.87/88 remains the best levels to consider selling on bounces.--Brian Dolan

The USD will continue to strengthen
Recent data has painted a very clear picture of deteriorating growth prospects in G7 economies outside of the US, while US data has shown increasing signs of stabilization. Still, nagging concerns remain about the US outlook. It's as if we're paddling down an uncharted river and we're not sure if the rocks we see up ahead are just shallow rapids or the edge of large waterfall. This uncertainty is the most likely driver of the current period of consolidation, and with major US data out next week (Beige Book and Aug. NFP, in particular) there are plenty of near-term risks to contend with. The data will eventually reveal itself to us, but as we have argued in recent weeks, US consumers have retrenched and look able to weather the storm, as long as it doesn't last too long. This view, contrasted with eroding outlooks elsewhere, keep us fundamentally biased toward further USD gains.

The other major USD support going forward stems not from currencies as a barometer of national outlooks, but rather from currencies as an asset class. Over the last five years as the USD weakened, US investors increasingly sent investments abroad. With stumbling economic outlooks in Europe/UK/Japan and fresh signs of slowing in Asia ex-Japan, US investors will increasingly be repatriating assets back to the US. The sudden rebound in the USD has likely caught many investors flat-footed, meaning the bulk of USD asset repatriation has yet to hit the market. These flows will be an ongoing source of USD support over the next several months, regardless of what the US data suggests for the here and now. (And we're not talking a few billion here, but rather trillions of dollars in off-shored investments.) Next Friday's Aug. NFP will likely be a case in point. We will be watching closely to see if the USD is able to shrug off another expected job loss, which would be another indication of the long-term nature of the current USD recovery. Should the USD react more negatively, we'll take it as an indication that consolidation is ongoing.--Brian Dolan

RBA, BOC, ECB, and BOE rate decisions next week
It is a busy week for central banks with the RBA, BOC, ECB and BOE all due to decide on interest rates. Below we offer a summary of what to expect from each meeting and the likely reaction in currencies.

• Reserve Bank of Australia
The Reserve Bank of Australia is set to announce on Tuesday at 0430GMT and the broad consensus is that the bank will reduce the current 7.25% target rate by 25 basis points. Economic activity has slowed in recent months with retail sales slipping to an annual growth rate of 3.2% in June -- the weakest run-rate since October 2005. Meanwhile, slowing global growth will continue to put pressure on red-hot commodity prices which will impact the Australian economy's terms of trade notably. We have seen this first and foremost in the US with weakening gasoline demand driving oil prices down more than $30 from the all-time highs. The key for this event will be what the RBA says or hints about the future path of rates. If they allude to further rate cuts from here we would expect sharp selling in AUD/USD with the 0.8500 zone vulnerable. On the flipside, no rate cut should see Aussie back up towards the 0.8700 mark.

• Bank of Canada
The Bank of Canada's rates confab is scheduled for 1300GMT on Wednesday and the consensus is unanimous in calling for no change to the 3.00% policy rate. Inflation, at an annual rate of 3.4%, is running well above the bank's target of 2.0% while economic data have been mixed. In the latest month the unemployment rate fell to 6.1% in July from 6.2%, June building permits were crushed -5.1% from 2.0%, while core retail sales jumped 1.4% for June after a 0.6% result -- to name a few. The uncertainty over the economic outlook coupled with uncomfortably high inflation augurs for a BOC on hold. That said an unexpected rate cut would probably see USD/CAD test daily trendline resistance near the 1.0720/30 area, which goes back to the 1.1880 highs in February 2007.

• European Central Bank
The European Central Bank is up on Thursday at 1145GMT with the usual press statement following at 1230GMT. The consensus is for the bank to leave rates on hold at the current 4.25% level. As such, the press statement will once again be in focus. Recent comments from ECB member Axel Weber that a rate cut is currently premature are likely to resonate in Trichet's post rate decision comments. That said Trichet will also have to acknowledge that economic growth has clearly slowed with 2Q GDP printing negative and recent business surveys like the German IFO -- which plunged to 94.8 in August from a prior 97.5 -- suggesting no speedy recovery in 3Q. While likely to be similar to the prior press statement which harped on inflation worries and downgraded growth slightly, we would expect a potential bounce in EUR/USD if Trichet suggests rate cuts are out of the question. In this case we would look to sell post-Trichet EUR bounces as reality sinks in that the Euro-zone economy remains on shaky ground.

• Bank of England
Last but not least, the Bank of England will decide on rates on Thursday at 1100GMT. The consensus here is unanimous that the bank will leave rates at the current 5.00% level. If this happens, the release will turn out to be a non-event as the BOE does not provide a press statement unless they make a change to rates. The meeting will likely prove to be contentious as per the latest musings from BOE member David Blanchflower who noted the very real risk of the UK plunging into a recession. Indeed he said that he expects "negative growth" for "several further quarters.'' While the risk of a rate cut is an extremely low probability event, this would be the only thing to shake up GBP/USD in a big way. On such a surprise we would expect Sterling to see a sharp leg-down towards the 1.8000 area. --Jacob Oubina

Key data and events to watch next week
There are a plethora of top-tier US indicators due up in the week ahead. ISM manufacturing and construction spending kick things off on Tuesday. Factory orders and the Fed's Beige Book are due up on Wednesday. We will provide a detailed report on what to expect from the Beige Book next week. ADP employment, productivity and the usual weekly jobless claims data are due on Thursday while Friday closes out the week with the all-important NFP employment report. There are also a number of Fed speakers on tap next week with Kroszner and Hoenig up on Monday, Rosengren on Wednesday, and Fisher and Yellen scheduled for Thursday.

The Euro-zone also sees a very busy week which starts on Monday with German retail sales and Euro-zone PMI revisions. Tuesday has Euro-zone PPI on deck while Euro-zone retail sales are up on Wednesday. French employment and German Factory orders are due on Thursday. The highlight on Thursday, however, will be the ECB rate decision (see write-up above for details). German industrial production rounds out the week of data on Friday.

The action in the UK is on the light side but is important nonetheless. Consumer lending data kicks off the week on Monday with consumer confidence following on Tuesday. The all-important BOE rate decision closes out the week on Thursday. The market expects no change to rates which would mean a non-event here (more details above).

It is extra light in Japan next week with labor earnings data due up on Monday and capital spending on Thursday the only noteworthy reports. Bank of Japan Governor Shirakawa is due to speak on Tuesday as well.

Canada has limited economic events also, with the BOC rate decision the highlight on Wednesday. Friday closes out the week with the top-tier employment report and Ivey PMI index.

It's modestly busy down under but it is all Australia as New Zealand sees no noteworthy data releases. The week kicks off on Sunday with the AiG manufacturing index followed by the current account balance on Monday. Tuesday has building approvals and the all-important RBA rate decision on tap. Data for the week ends with 2Q GDP on Wednesday and the trade balance on Thursday.--Jacob Oubina

FOREXYARD

USD
With New Home Sales on Tap Will EUR/USD Test 1.4550?
Intra-day gains in the dollar on a better-than-expected U.S. Existing Home Sales report tended to be short lived even though stabilization in the U.S. housing market is seen as critical to ending some of the concerns on the U.S. economy. The dollar finished yesterday's trading session with mixed results versus the major currencies while staying relatively unchanged against the EUR ultimately closing at 1.4709.

Still, lingering concerns on problems at U.S. mortgage finance companies Fannie Mae and Freddie Mac are keeping housing data at the forefront of investors' focus for this week. Data on New Nome Sales for July and 2 surveys of Nationwide House Prices are expected to be released today.

Meanwhile, Federal Reserve Chairman Ben Bernanke spoke on financial stability at the Kansas City Fed's annual Jackson Hole conference. His commentary didn't necessarily reveal anything new, though he did say that the recent decline in commodity prices, as well as the increased stability of the dollar, has been encouraging. If not reversed, these developments, together with a pace of growth should lead US inflation to moderate later this year. Analysts estimate that longer term prospects for a stronger USD remain intact given that the United States is likely to overcome the problem of slower growth sooner than other nations. The general sentiment towards possibly lower Interest Rates and towards the U.S. economy managing to get out of the global crisis earlier than the other economic areas will probably support the dollar over the next couple of months.

In today's housing data investors will look for clues on whether the battered property market is indeed stabilizing - which would be a relief for both the economy as well as for hard-hit US financial firms holding mortgage assets.

Later today, the FOMC Meeting Minutes from the Federal Reserve's August meeting may also be the event to watch. This record of the FOMC's latest meeting is expected to provide insights into the economic conditions that influenced member's vote on Interest Rates as well as offering clues on the possible outcome of future votes.

EUR
EUR Drops On Speculation of Euro-Zone Turmoil.
The EUR dropped towards a 6 month low against the USD yesterday before the German Ifo survey of business sentiment, with investors seeking clues on whether the Euro zone economy is hurting enough for a cut in Interest Rates. In thin yesterday's trade on the back of a UK public holiday, the EUR was down 0.3% at $1.4709 and down 0.7% at 161.68 vs. the JPY.

Signs of a broadening global economic slowdown have given the USD a boost in the past month as investors have dumped the currencies of economies losing steam, such as the EUR and the GBP. In fact, British Pound hit 2 year lows against the dollar on Monday. Last week's data showed the UK economy ground to a halt in the second quarter of the year, its worst quarterly performance since 1992, highlighting the risk of a British recession and raising the chance of a UK Interest rate cut later this year. Overall, the pound is down 6.6% against the dollar in 2008, the largest drop of any major currency other than the New Zealand dollar. With stalled UK growth which is seen as another example of growing economic malaise outside the United States, the GBP weakness helped the dollar against some currencies including the EUR.

Looking ahead for today, there are few major indicators on hand, though some releases can spark short-term volatility including both German IFO Climate and German IFO Expectations indices.

JPY
Japanese Economy Once Again Faces the Threat of Deflation.
Yesterday, the JPY was up broadly on the unwind in carry trades, although traders noted that the Japanese currency does not respond as sharply to the moves in stocks as it did earlier in the year when any sharp equity slide would send the Yen flying higher. By the end of yesterday's trading session, the JPY added 0.6% and closed at 109.41 vs. the USD. The big question now is whether it's the beginning of the carry trade unwind wave and a trend reversal for the Japanese currency or just another local correction.

Until yesterday, the JPY appreciated against the USD as U.S. financial shares dragged equity markets lower on persistent credit concerns, which prompted investors to reduce risk. The decline in the attractiveness of U.S. assets reduced demand for the dollars to buy them while simultaneously pushing investors into investments perceived as less risky, such as the Yen.

As usual, the move in the Japanese yen has little to do with Japanese fundamentals, and instead depends much more on broad risk appetite. This should continue to be the case during the rest of this week even though there will be heavy risk events on hands. Today there is no news events expected from the Japanese market, however on Thursday the Japanese CPI, the Unemployment Rate and Retail Sales numbers will all hit the wires. The CPI numbers may not influence price action too much, but the indicator should be watched as the headline index is anticipated to hit decade highs due to energy and food costs, while the core measure may barely reflect positive price growth.

Indeed, once commodity prices start to fall back again, the Japanese economy will once again face the threat of deflation. Concerns about credit risks both in the United States and Japan are still strong and given the risk of recession in the country, traders will be looking for indications that the BoJ is considering reducing Interest Rates.

Crude Oil
Baku-Tbilisi Pipeline May Resume Full Operations Within Days.
Crude Oil was little changed after rising yesterday to a $115.40 level as tropical storm Gustav formed in the Caribbean Sea, raising concerns it may threaten oil fields in the Gulf of Mexico. Fields in the Gulf of Mexico account for about 20% of U.S. oil output. Prices also rose after Russian lawmakers voted to recognize the independence of two breakaway Georgian regions, increasing the prospect of new tensions in the area. On the other hand, the Baku-Tbilisi-Ceyhan pipeline, which moves oil from Azerbaijan through Georgia to Turkey's Mediterranean coast, may resume full operations within days after a fire halted exports. This may definitely assist in bringing Oil prices further down. U.S. Light Crude edged up 29 cents yesterday to $115.40 a barrel though it still remains more than $30 below an all-time high reached only a month ago.
Technical News

EUR/USD
The pair is in the middle of a bearish trend as the attempts to breach through the 1.4620 support level continue. The daily chart's Slow Stochastic indicates that the bearish momentum is still strong and a breach is very likely. Going short appears to be preferable.

GBP/USD
The cable is testing the key Fibonacci level of 1.8400 and is the middle of a very strong bearish trend. A breach through that level will validate a much stronger bearish trend that might take the pair to the 1.8350 zone. Going short might be the right path today.

USD/JPY
The bullish channel continues at full steam, as the 4 hour chart is showing that there is still much steam in the trend. The daily chart is showing a double doji formation with a bearish cross on the slow stochastic which might indicate a moderate corrective move before the bullish trend resumes. Buying on dips might be a great strategy for that pair.

USD/CHF
The bullish trend continues at full steam as the pair shows no immediate signs of a halt. The 4 hour Slow Stochastic is showing a positive slope and the RSI is floating at 50 which points at additional bullish momentum. There seems to be no upcoming correction on the local level, and going long looks like the right decision today.

Consolidation setting in, but continue to favor USD

Consolidation setting in, but continue to favor USD
The USD made fresh new highs early in this past week, but was unable to sustain the gains and a consolidation phase appears to be setting in. The economic fundamentals largely supported those moves, with European data largely coming in steadier than expected and US data presenting worrisome elevated jobless claims, weaker housing and a larger than expected drop in the index of leading indicators (mainly due to the drop in building permits). We know the US housing sector remains mired in weakness and that the new homes segment is the weakest of this weak sector, so there should be no surprises. The jury is still out on the reliability of weekly jobless data due to extensions to unemployment eligibility passed in early July. But we also already know that the US labor market was soft, just not as bad as in prior downturns on a population adjusted basis.

Net-net, the US outlook continues to point toward likely stabilization while growth outlooks elsewhere continue to erode. We will get some important forward looking data out of Europe next week (IFO, GFK and EC sentiment gauges) that's likely to augur further weakness ahead. We'll also get some backward looking US data (first revision to 2Q GDP) and a slew of housing reports. On balance, the data should continue to offer optimism on the US outlook, though with a somber tinge of uncertainty remaining. Jake Oubina provides a more in-depth update on this theme below. These are the types of environments that frequently lead to periods of consolidation, but the unfolding big picture continues to favor the USD resuming its abrupt reversal higher.

Technically, EUR/USD looks to have formed a bear flag channel, a counter-trend consolidation pattern, with the base at 1.4730/40 and rising, and the top at 1.4930/40 and rising. A drop below the base of the channel suggests the downmove is resuming, with a measured move objective of about 300 pips to target 1.4430/50. Thursday's pullback in the USD saw daily closes below the Ichimoku Tenkan lines (the fastest indicator in the system) for many USD pairs (AUD/USD and EUR/USD finished above), suggesting the USD upmove was potentially reversing. Friday's price movements, however, completely reversed the USD pullback and the USD closed back above the Tenkan lines (EUR/USD and AUD/USD below) signaling the USD upside was back in play. Weekly candlesticks in EUR/USD show a long tail to the upside, signifying rejection of attempts to rally. Also, EUR/USD came close but could not touch the 55-week moving average at 1.4919. GBP/USD posted a bear engulfing pattern on Thursday and Friday and the obvious breakdown level in GBP/USD is at 1.8500. Weekly USD/JPY has a similar long tail to the downside, signaling rejection of attempts to sell it lower and the upside breakout level is at 110.50/60. Strength above there is likely to see a rapid follow-through to near 112.00.--Brian Dolan

Commodity rebound is a bounce to sell on
Closely linked to the goings on for the USD are developments in commodities. In case you have not been following the chicken-and-egg trading patterns between gold, oil, and the USD, it's easy to be confused by which is leading which at any given moment. Oil traders point to USD gains as a reason to sell oil, while FX traders point to oil dips as a reason to buy USD. Gold traders are watching both FX and oil, and we're all watching gold, too. But keep in mind commodities started this whole move lower and the USD has mostly followed. But that is not to say the USD cannot also break out and wear the yellow jersey (Tour de France) for a day or two. The pullback in the USD on Thursday was presaged by a bounce in commodities on Wednesday and follow-through gains on Thursday. Oil led the way by closing above its Tenkan line on Wednesday evening, but then it ran into the next Ichimoku resistance line (Kijun) which sent oil plunging back down to close below its Tenkan line. Those sharp whipsaws are further evidence that we are in a bear market for commodities and a new bull phase for the USD.

In case you have been following the debate about whether commodity price increases have been driven by demand or speculation, I would suggest oil price gains into the $80/bbl area represented fundamental demand increases, but that most of the gains since then have been driven by speculation. Over the last several weeks, it has become commonplace to see 3-5%+ daily ranges in oil and other commodities, with oil gaining 5% on Thursday and then losing nearly 6% on Friday. Prices don't fluctuate like that when it's just supply/demand driving the boat. The other element to keep in mind when looking at commodities and the USD is global growth is slowing, with more to come. Fundamentally, slower global growth will reduce commodity demand and bring prices down. Which brings us back to an answer to the chicken-and-egg question--it doesn't really matter which is leading--just keep looking for suitable levels to sell commodities on bounces and to buy USD on dips. A daily close in WTI oil below its 200-day moving average at 110.69 should see quick follow-on drop through the psychologically significant 110.00 level and target weakness toward $100 initially.--Brian Dolan

Status check: The US vs. the Rest
Our developing theme that economies abroad continue to worsen while US fundamentals show signs of stabilization rang true once again this past week. This is part and parcel of our fundamentally bullish USD view. Timely data out of the Euro-zone showed economic sentiment and business activity continued on a downward path while indicators in the US suggest this economy is merely treading water. The German ZEW survey of economic sentiment rose a touch in August but the 3Q average remains at a horrible -59.7 from -44.8 in 2Q, when the German economy printed a negative GDP. The Euro-zone equivalent is averaging -59.7 in 3Q as well from a -47.0 read last quarter. Meanwhile, PMI manufacturing surveys came in below the expansionary 50 level in August. French PMI fell to 45.1 from 47.1, German PMI dipped to 49.9 from 50.9 and the Euro-zone measure came in at a paltry 47.5 for the month. These relatively timely indicators suggest a Euro-zone economy in the dumps.

US data was pretty much in line with an economy just chugging along, albeit at a low pace. Housing remains weak as suggested by the steady but low 16 print in the National Association of Home Builders index and lackluster housing starts numbers, which declined to 965K from 1084K in July -- though much of this was a correction from the prior month's read which was distorted and propped up by a change in New York City's zoning laws. The overall trend for housing starts over the past six months has been relatively steady and suggests a bottom is in the offing. The US job market continued to look stagnant with initial claims running at 432K in the latest week, a touch lower than the 445K print previously. The jobs data have not deteriorated of late though and claims still remain well below the 500-510K "recession" threshold. So while the deterioration in the Euro-zone is palpable, US data was pretty much steady as she goes.

The weakness abroad not only will help the relative attractiveness of US investments and the US dollar but also looks poised to stop the commodity bull market in its tracks. Consider that US demand destruction helped tip oil prices from an all-time high near $147 towards just below the $115 mark currently. Further slowing in the growth of overseas economies would have a detrimental impact on many other extended commodity prices, as well. We believe this slowing is for real and as such modest rallies in commodities are likely to prove to be just blips within the larger move lower. The end of the commodity bull-run would benefit the USD quite a bit on the follow as the inflation hedges come off (i.e., lower gold prices) and the buck is given a psychologically important boost. --Jacob Oubina

Key data and events to watch next week
The US economic calendar is bustling next week with a number of top tier indicators on deck. The week kicks off Monday with existing home sales. Tuesday is a busy one as we'll see consumer confidence, new home sales, and the minutes of the August 5 FOMC meeting. Wednesday has durable goods along with a speech on inflation from Atlanta Fed President Lockhart. Thursday sees the usual weekly initial jobless claims and the preliminary 2Q GDP numbers which are expected to see a substantial upward revision. Friday ends the week on a busy note with personal income/spending, core PCE, Chicago PMI and University of Michigan confidence all due up.

The Euro-zone calendar is also very busy and kicks off on Tuesday with German GDP, German GfK consumer confidence, French housing starts, and German IFO surveys. On Wednesday we only have German import prices due up. This will be followed by German employment and a speech by German Finance Minister Steinbrueck on Thursday. Euro-zone unemployment, Euro-zone CPI estimate, Euro-zone confidence surveys and German CPI round out the week on Friday.

Japan is relatively light next week. It starts off with employment data, consumer prices, industrial production and retail trade on Thursday. Housing starts and small business confidence close out the week on Friday. Other notable events include speeches from BOJ Governor Shirakawa on Monday and BOJ Board Member Suda on Thursday.

Not much going on in the UK either. Notable data include BBA home loans on Tuesday and nationwide home prices, GfK consumer prices and the CBI distributive trades report (a retail sales survey) on Thursday.
Canada is also very light and kicks off with the current account data on Thursday. Industrial product prices and the monthly GDP report round out the week on Friday. Recall that last time around Canadian GDP surprised to the downside. We would expect a similar outcome would see sharp losses in CAD.

Last but not least, it is modestly busy down under. New Zealand has trade balance data scheduled for Monday. Tuesday sees RBNZ inflation expectations followed by business confidence on Wednesday. Thursday has Australian leading indicators and New Zealand building permits on tap. Friday rounds out the week with Australian private sector credit and new home sales. --Jacob

FOREXYARD

Unemployment Claims May Define USD Direction.
Yesterday the EUR/USD pair experienced a highly volatility and finished trading session with mixed results versus its major rivals. The EUR/USD bounced up and down during most of the day, finally closing at 1.4773 level, unchanged from the day prior. Overall, it lost 0.2% vs. the EUR yesterday when it declined to $1.4773 from $1.4747. The greenback may fall to $1.50 per EUR in a few days should it weaken below $1.48.

Expectations for the near future look to hold unclear characteristics as the upcoming US calendar doesn't look to have much that can help revive USD bulls once again. Yesterday's slightly bearish dollar trend was especially concerning due to the lack of market moving economic events both from the US and the Euro-zone. As it seems now the greenback light depreciation comes mainly on the heels of traders fearing the US economy woes are not over. From the fundamental point of view, the only economic release that deepened USDs' falling trend yesterday was the Crude Oil Inventories. The indicator printed a much higher than expected result of 9.4M. Due to the unexpected figure, Oil prices rose sharply, which helped to further tumble the US currency.

The dollar also weakened on speculation credit- market losses in the U.S. will deepen. Fannie Mae and Freddie Mac shares tumbled in New York trading to the lowest levels since at least 1990 as speculation increased that the U.S. Treasury will have to bail out the mortgage-finance companies.

The U.S. economic outlook darkened in July for a 3rd consecutive month as Philadelphia Fed Manufacturing report today may show another contraction. The Philadelphia Fed's general economic gauge due at 14:00 (GMT) is projected to come in at -12.6. If the final figure will indeed print such a low result today, we may see the dollar continuing its falling trends vs. the rivals. The leading index is also due today at 14:00 (GMT) from the New York-based research group. The Conference Board's index of Leading Indicators, a measure of the economy's direction over the next three to six months, is expected to decline by 0.2%, according to the median forecast. The previous measure fell 0.1% in June Overall, given today's pessimistic fundamental forecasts, the USD may find itself falling deeper into a bear's cave during the day.

Will The Heavy Fundemantal Day Pull The EUR Up?
The EUR finished yesterday's trading session with mixed results versus the major currencies. The 15 nation's currency saw high volatility especially against the USD finally closing at 1.4773 level, unchanged from the day prior. EUR also appreciated yesterday versus the GBP finally closing at 0.7916 price level. The EUR gained yesterday vs. the USD on concerns that futures traders will pare bets on USD gains, which has gained against most of its currency rivals during this month.

Overall, the EUR has lost 7.7% versus the USD since touching an all-time high of 1.6038 on July 15. The European currency depreciated as reports showed the Euro zone economies shrank in the 2nd quarter and Crude Oil fell more than 20% from the record $147.27 a barrel reached July 11.

However, gains in the EUR may be limited as Germany's Economy Ministry yesterday said the economic outlook has worsened even beyond the 2nd quarter, when Gross Domestic Product shrank for the first time in 4 years, as reports reveal. Investors are also uncertain about whether the EUR uptrend can be sustained in the context of a slowing U.S. economy. Look ahead to today, we have a batch of an important EUR data. Economic events coming from the Euro-Zone are the Flash Manufacturing PMI and Flash Services PMI. These indices are seen as leading indicators of economic health in general. Businesses usually react quickly to market conditions, and their purchasing managers hold perhaps the most current and relevant insight into the company's view of the economy. A lot of attention will be focused on the outcomes of today's reports as they might hint on crucial decisions regarding the inflation revision in the Euro zone and the future of the local currency.

The JPY Looks To Extend Its Profits?
The JPY underwent a bullish trading session yesterday, as it appreciated against most of its major currency rivals. The JPY saw a 60 pips rise against the USD as the pair went below the 109.60 level. The JPY also saw rising trends against the EUR and the GBP.

Yesterday, the Japanese government bond futures retreated after pulling back from four-month highs as prospects for an interest rate cut from the Bank of Japan were dismissed. Governor Masaaki Shirakawa reiterated the central bank view that the economy would eventually return to moderate growth. That cooled expectations that the BOJ will be forced to cut interest rates by early next year, and acted as a significant support for the JPY.

As for today, the sole event that is scheduled from the Japanese economy is the Monetary Policy Meeting Minutes. This indicator will likely to have little effect on the market as it released at 23:50 GMT. Forex traders invested in JPY related crosses should stay tuned to stock market movement today as this information should determine JPY's direction for today.

U.S - Russia Tension to Raise Oil Prices
Crude Oil prices continue to rise as Oil made its 3rd consecutive day of bullish behavior. A barrel of Crude is currently traded around $116.50, $3 above yesterday's midday rate.

The U.S Crude Oil Inventories indicator has initially driven Oil prices down to $113 a barrel, as the publication of this indicator showed that prior expectations for a 0.7M increment were sorely moderate as the indicator demonstrated a 9.4M additional barrels as opposed to last week. However, shortly after Oil prices have resumed their uptrend.

In addition, the U.S-Poland agreement that allows the U.S to construct a missile-defense system in Poland has generated a great deal of tension between U.S and Russia. Therefore Oil prices are expected to rise even more.
Technical News

EUR/USD
It seems that the pair is extending its bullish correction, as it entered an uptrend ever since it tested the 1.4630 level. Currently, all oscillators on the 4 hour chart are pointing up, suggesting further bullish behavior for the pair. Going long might be preferable today.

GBP/USD
The pair has been range-trading for a while now, as the cable appears to consolidate around the 1.8600 level. The Bollinger Bands on the 4 hour chart are tightening, indicating that a significant breach is forthcoming. Traders should wait for that breach and swing.

USD/JPY
After a long period in which the pair has mainly fluctuated, it seems that we are on the verge of a relatively strong move. The pair has crossed the lower border of the 4 hour chart's Bollinger Bands, indicating that it should enter a downtrend. A breach through the 108.60 might validate the bearish move with a price target of 107.80.

USD/CHF
The pair has consolidated around the 1.0950 level, without making any major breach for a while now. As all oscillators on the 4 hour chart are giving bearish signals, it appears that going short with tight stops might be the right strategy today.