Week Ahead In US Financial Markets (July 28-August 1)

Financial Markets Summary For The Week of July 28-August 1
The week of July 28-August 1 will see a fairly significant amount of US macro data. The major releases will be clustered near the end of the week on Thursday and Friday. Thursday will see the publication of the preliminary GDP for Q2, jobless claims, Chicago PMI and the employment cost index for Q2. The week will be capped by the release of the July non-farm payrolls report and the estimate of the ISM of national manufacturing conditions for that same month. Tuesday will see the release of July consumer confidence survey by the Conference Board and Wednesday will see the ADP estimate of payrolls for July. The week will see another heavy five days of earnings statements with heavyweights such as Disney, Starbucks, Chevron and Berkshire-Hathaway reporting near the end of the week.

Fed Talk
The only Fed speaker scheduled for the week is FOMC Gov. Mishkin who will give an address titled "Whither Federal Reserve Communication," on Monday. As is custom one week ahead of an FOMC meeting beginning Tuesday, there will be a blackout on Fed speak.

Chart of the Week

Consumer Confidence (July) Tuesday 10:00 AM
Consumer confidence for the month of July should see another 30 days of sagging sentiment among individuals subject to an increasingly difficult job environment. We expect that headline will decline to 49.2 on the back of continued stress among consumers. With the rebate checks spent, there is precious little to offset the real reduction in purchasing power among consumers due to a weak dollar and rising inflation. The aforementioned factors should combine to press the headline estimate of consumer confidence to decade long lows.

GDP Q1 Preliminary Thursday 08:30 AM
The combination of a 1.0% increase in personal consumption and a 1.9% increase in net exports should provide a decent rate of economic expansion during the initial estimate of output for Q2'08. However, the data elsewhere is still relatively weak. Firms carefully managed the purchase of stock and it does appear that inventories contracted at a rate of 0.5% for the quarter. More importantly, due to data suggesting that expenditures on fixed business investment remain absolutely flat and the ongoing contraction in residential investment, we do expect that overall investment should again provide a net drag on overall growth. Thus we expect to see an increase of 2.1% in the preliminary estimate of GDP for the second quarter of 2008.

Employment Cost Index (Q2) Thursday 08:30 AM
Although inflation has continued to work its way through economy, there has been scant evidence that it has yet to put upward pressure on wages. We expect that to be the case again in Q2 when our forecast implies that employment costs will increase 0.8%. Due to a relative lack of bargaining power, labor is in no position to demand higher wages among a weak job market and uncertain economic prospects going forward.

Initial Jobless Claims (Week ending July 26) Thursday 08:30 AM
Initial claims for the week ending 26 July should see a slow and steady uptick back towards 380K. With the four week moving average trending in that direction after a bout of holiday induced data, the weak labor market does not at this time have the capacity to stimulate a move lower for the foreseeable future.

Chicago PMI (July) Thursday 09:45 AM
We expect that a month of weak orders and economic weakness in the upper Midwest should combine to drag down the headline estimate of the July Chicago PMI to 48.6. Our forecast implies that new orders should decline to 49.1 and prices paid should increase to 86.3 for the month. Although, the cost of imported oil eased during the month, the greater concern on a regional basis is the latest round of planned cutbacks in auto assembly schedules in Detroit that should further depress manufacturing activity in the area.

Total Vehicle Sales (July) Thursday-Throughout Day
Hope in the auto sector that rebate checks would provide a modicum of support for domestic sales did not materialize in June and sales took a sharp turn south. On the back of some very pessimistic forecasts out of Detroit we do not anticipate a recovery in demand for new cars anytime soon. Our forecast implies a modest bounce back in July with the sale of domestic autos arriving at 10.1mln units and demand for foreign fuel efficient autos modestly advancing to 13.9mln.

Non-Farm Payrolls (July) Friday 08:30 AM
The labor sector continues to see a steady downward drift and our forecast implies that the market will observe a net loss of -93k jobs in July. We expect that the service sector will see the second negative print in the past three months and further losses in the goods production and manufacturing sector should by the primary catalyst driving employment losses throughout the economy. Given some of the interesting adjustments at the Bureau of Labor Statistics regarding assumptions of job creation in the leisure and hospitality industries in June, we think that the report is ripe for downward revisions over the past two months and this should set the stage for what is shaping up to be another month of negative data from the labor sector.

ISM (July) Friday 10:00 AM
We have grown quite bearish on manufacturing conditions domestically, regardless of the still relatively strong demand from the external sector. Lackluster domestic demand has dragged down the headline reading below 50.0 four times during the first six months of the year. Our forecast indicates that this will be the case again in July when the headline falls to 49.3. We expect new orders to decline to 49.0 and prices paid to increase to 89.5.
Joseph Brusuelas
Chief Economist
Merk Investments
http://www.merkfund.com/
The views in this article were those of Axel Merk as of the newsletter's publication date and may not reflect his views at any time thereafter. These views and opinions should not be construed as investment advice nor considered as an offer to sell or a solicitation of an offer to buy shares of any securities mentioned herein. Mr. Merk is the founder and president of Merk Investments LLC and is the portfolio manager for the Merk Hard Currency Fund. Foreside Fund Services, LLC, distributor.

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This Week's Market Outlook

Highlights

• USD strengthens across the board; looking for more to come
• EUR/USD & USD/JPY price levels to watch
• Outlook continues to stabilize in US while deteriorating elsewhere
• Key data and events to watch next week

USD strengthens across the board; looking for more to come

The USD recovered broadly against other major currencies this week as the GSE panic subsided further and oil and other commodity prices continued their sharp retreat. US 2Q bank earnings reports also came in generally better than expected, though many firms still reported significant losses and write downs, but left the impression that financial sector hemorrhaging is nearing an end. Non-financial firms' 2Q earnings reports were also generally better than expected, reinforcing the notion that US firms are well-positioned to weather the current economic storm, with attendant positive implications for the US economic outlook.

In short, the US outlook continues to stabilize while fresh signs of deterioration are appearing in other major economies' outlooks, particularly in Europe and the UK. (We look at some key recent data points to support this view in the next section.) Hawkish Fed rhetoric (FOMC minutes, Stern and Plosser) has increased expectations of a Fed rate hike in the fall-Fed Fund futures now reflect a nearly 50% likelihood of at least a 1/4% increase in US rates at the September 16 or October 29 meetings. Increased US rate hike expectations, coupled with the sharp declines in commodity prices (stemming from overall slower global growth and demand, e.g. China's 1st half 2008 steel exports fell sharply), are dovetailing to support the USD. I am now more optimistic than in many months that the US will avoid a recession and that in a few months time we'll look back at July 2008 as the significant low point for the USD.

While I am significantly more optimistic that the worst-case scenario in the US and for the USD will be avoided, I would remind traders of the highly uncertain outlook both here in the US and globally, as well as recent range-bound trading conditions that have dominated FX markets this summer. Take it one step at a time. At the same time, I am very encouraged by the persistence of the USD's recovery this week-pullbacks were minimal and the USD is closing nearer to its highs for the week. I view such persistent price moves as an indication that markets were are not positioned for a USD rebound, and consequently had to chase the buck higher, limiting any pullbacks. That also suggests additional flows are likely to come into the USD in the weeks ahead, as shorts continue to unwind and long positions are established. The inverse relationship between commodities (oil still the key) and the USD (commodities down/USD up) continues to be the most visible trading correlation at the moment and will remain a key driver of USD. A WTI oil price drop below the $119-122/bbl support zone is the trigger for further steep losses, likely to the $100/105 area.

EUR/USD & USD/JPY price levels to watch

EUR/USD: Trendline support for the recent upmove since June 13 was broken on the drop below 1.5830, and is now resistance at 1.5900/10. A 'double top' looms above at 1.6020/40. More immediate resistance is at the 1.5750/55 level, which is marked by the Kijun line and the 38.2% retracement of the decline from 1.6038 to 1.5625. Only a daily close above the Tenkan line at 1.5833 signals further upside potential. The Tenkan Line is falling and looks set to cross down below the Kijun line next week, generating a sell signal should it occur. To the downside, the Ichimoku cloud is below between 1.5652 and 1.5572, and a drop through there will confirm fresh weakness ahead. The 100 and 55-day moving averages are also at the 1.5655 level. Also, there was talk this week of institutional buying orders between 1.5570/1.5620, highlighting that area as the key to further weakness. I look for 1.5450 next on a daily close below 1.5570.

USD/JPY: Broke and closed above the 200-day moving average, now at 106.93, and trend line resistance from recent highs, now support at 106.60/70, highlighting the potential for further gains. 108.00 is immediate resistance from a trend line drawn off the 6/16 and 6/25 intra-day highs, and above there is the recent high at 108.65/70 as the next target. Overall, the shift above the 200-day moving average suggests potential to 109.50/110.00 area. USD/JPY is currently above the Tenkan and Kijun lines at 105.88 and 106.10, respectively.

Outlook continues to stabilize in US while deteriorating elsewhere

The relative strength of the US economy versus its counterparts across the pond seems to be shifting in earnest. While no one can say that US growth has rebounded and is now on the verge of turning higher, it can be said that the data of late suggest signs of stabilization and that the worst of the declines are very likely behind us. Consumer confidence is improving, business activity looks resilient, and housing seems pretty darn close to putting in a bottom. In contrast, the European economies are witnessing renewed deterioration in these areas. We believe that the market has not yet priced in these developments and that the potential for a firming in the USD is very real, from a fundamental standpoint. We highlight some of the key economic developments here.

Consumer Confidence

Falling oil prices are translating into a more upbeat US consumer as evidenced by the latest University of Michigan sentiment numbers. The headline index jumped to 61.2 in July from 56.6 in June, and the first time above 60 since April. More importantly, the economic outlook component rose to 53.5, which is the highest result since March. This highlights US consumers' obvious sensitivity to gasoline prices and suggests that if oil continues to crumble, consumer spending looks to hold up even after the tax stimulus dissipates. On the flipside, the data in the UK this week showed a consumer on the brink. Retail sales for June plummeted -3.9% on the month and the annual growth rate sank to just 2.2%, the weakest since early 2006. This is why despite the hawkish inflation talk recently from the BOE we are still sellers of GBP/USD on rallies and especially into the 2.00 area.

Business Activity

Business confidence took a turn for the worse in the Eurozone this week as pretty well every indicator measuring sentiment fell. French business confidence slipped to 98 from 101, German IFO business climate plunged to 97.5 from 101.2, and the Eurozone PMI composite fell to 47.8 from 49.3 just to illustrate a few. Meanwhile, business spending in the US was running on nearly all cylinders in June. The latest report on capital spending showed that non-defense capital goods ex-aircraft orders -- which feed directly into GDP -- rose a strong 1.4%, while core shipments were up a healthy 0.7%. This suggests an increase in US 2Q GDP of more than 2.0% (the current consensus) and the robust orders provide a good handoff to 3Q to boot.

Housing

Housing has been a thorn in the side of the US economy for some time now and it looks from the last few months of data that stabilization is finally in the works. Existing US home sales seem to have found a bottom near 4.9 million units, as the pickup in foreclosures continues to create bargains for market entrants that were once hesitant about falling home prices. The new home sales data also showed signs of improvement, especially on the very worrisome inventory front as the latest release showed months' supply falling to 10.0 on higher sales, even as median prices rose. The same cannot be said about Western Europe where the UK saw mortgage approvals plunge to the lowest level since 1997 just this week and an inventory glut of new homes in Spain threatens to plunge that economy into recession.

Key data and events to watch next week

Next week marks month end and traders should be aware of reduced liquidity and heightened volatility, especially around key economic data releases. We believe the ramped up volatility bodes well for a USD break higher as lower volumes will see more explosive trading. Also keep in mind that the Senate is expected to sign the GSE legislation this Saturday (July 26), a measure already passed by the House. President Bush has announced his intention to sign the bill into law and this will remove another cloud hanging over the US markets.

The US economic calendar is bustling with top-tier events next week. It kicks off with the Case Shiller home price index and the Conference Board consumer confidence measure on Tuesday. Wednesday sees the ADP employment report, which has been pretty unreliable as a gauge for the government's measure of employment change. Thursday we have the advance release of 2Q GDP and the Chicago PMI index. Friday is the big day with the July NFP employment report release, ISM manufacturing, and construction spending all on tap.

The Euro-zone will also be pretty hectic, and it starts the week off with German GfK consumer confidence on Monday. Tuesday is jam-packed with French producer prices, French housing starts, German consumer prices, and the German Trade Chambers' company export survey -- this should give us some color on how the high priced euro is impacting European trade sentiment. (Our hunch is negatively.) On Wednesday we'll see Euro-zone business climate indicator, Euro-zone consumer confidence, and German retail sales. Thursday rounds out the key data with Euro-zone CPI estimate and German unemployment data.

The data week in Japan is pretty light and starts the off with the employment numbers and retail trade on Monday. Tuesday we have industrial production on tap and Thursday closes out the week with housing starts.

The UK is also relatively on the modest side. Tuesday starts it all off with consumer credit, mortgage approvals, and CBI distributive trades report (a private retail sales report) all on deck. Wednesday sees the all important GfK consumer confidence report while Thursday has nationwide home price numbers out. Friday rounds out the week with the release of the PMI manufacturing report.

Canada is very light but important nonetheless. Wednesday has the industrial and raw materials price indices while Thursday sees the important May GDP numbers. The reports will be key to assessing the Canadian inflation-to-growth balance and should provide guidance as to the BOC's next move on rates.

It is modestly busy down under and the week kicks off with New Zealand trade data on Sunday evening. Monday sees Australian leading indicators along with New Zealand building permits. Tuesday we'll see the Australian NAB business confidence while Wednesday brings Australian building approvals. Thursday has the all important Australian trade balance and Australian retail sales data on deck. Last but not least, the AiG manufacturing index is on tap for Friday.

Forex.com
http://www.forex.com

DISCLAIMER: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase of sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

READ MORE - This Week's Market Outlook

The Weekly Bottom Line

HIGHLIGHTS

• U.S. home construction shows signs of life
• Global inflation and growth woes remain

In the 1980s, economist and Nobel laureate Amartya Sen found that famines tend to happen not because of a lack of food, but because of obstacles preventing those in need from acquiring the existing stores of food. This juxtaposition is center stage across the globe right now - an ongoing famine for liquidity in many financial and housing sectors versus the flood of petro-liquidity driving consumer and producer inflation higher worldwide. We have liquidity in spades, just not in the sectors that welcome it or need it most.

Why so serious?
Remember April and May? The leaves were returning. The flowers were blooming. The credit crunch was over. Well, the spring fling is over and markets have come to the realization - which incidentally has been TD Economics base case scenario all along - that the credit crunch will continue to slowly bleed for some time. While the market roller coaster saw increasing optimism early this week, apparently markets forgot that the U.S. housing market remains in shambles. There is some light. For the first time since the spring of 2007, the 3-month trend in new home sales and starts is positive. New home construction is what is captured in GDP measures of residential investment, and this same signal preceded rebounds in U.S. residential investment in each of the last three downturns. Existing home sales, on the other hand, make up the majority of the U.S. housing stock and mortgage market, and sales there dropped another 2.6% M/M in June and are down over 15% over last year. Critically, at this current pace of sales, it would take over 11 months to sell the inventory of unsold homes already on the market. And this doesn't include other homes dumped on the market in coming months through foreclosure or voluntary sales. In the second quarter, one in every 171 U.S. households was foreclosed on - with Nevada showing a staggering one in 43 households and California one in every 65.

This is the heart of the liquidity famine. As more homes are dumped on the market, home prices fall further, driving further mortgages underwater, leading to further foreclosures, further homes dumped on the market, and further home price declines. Lather. Rinse. Repeat. At some point, lower prices will entice buyers into the market, but not until the expectation for further declines recedes. Why buy today when you can buy next year for 10% less? In the meantime, liquidity in the housing market is nonexistent. This feeds directly into the current dilemma for the financial sector. The smaller and more regional the bank, the more exposed to the mortgage market. Real estate loans account for 1/3 of all assets of U.S. commercial banks - over ½ of all assets for banks with total assets less than $1 billion - and nearly 2/3 of assets of savings and loans. This puts these institutions in a vise, and those like Fannie and Freddie that have bought or underwritten about half of all these mortgages in a bind. As a result, commercial banks' average daily borrowing of $16 billion from the Fed's emergency lending programs last week was the highest ever.

So the issue becomes what can be done to get that liquidity flowing again? In a perfect world, we'd let the market work itself out. Prices would fall to the point that buyers would move in, and larger banks would recapitalize by attracting investors. But current regulations limit the ability of buyout firms to move into the banking sector - an issue the Federal Reserve is reportedly trying to address - while large foreign investors that bought into large banks earlier have since lost money on their investments and may be once bitten, twice shy. The bill moving through the U.S. Congress right now hopes to help stop the self-fulfilling prophesies of doom, gloom, and liquidity vacuum. The government would increase its debt ceiling by about $800bn - about half of which could cover the expected 2008 federal deficit and the other half would be there just in case. This "just in case" would help cover, among other things, the federal government insuring approximately $300bn in mortgage debt belonging to 400,000 American households who will refinance their subprime loans into 30-year fixed-rate mortgages, $4bn in federal transfers to the states, and the ability of the U.S. Treasury to buy stock in Fannie and Freddie up to the federal debt ceiling. As banks continue to struggle, these two institutions are key to helping the U.S. mortgage market grind on. While not ideal, a government backstop may be just what is needed to avoid their failure and the vicious cycle in the mortgage market. Earlier this week, the Congressional Budget Office estimated the cost of the Fannie and Freddie rescue plan at $25bn. As with most of the estimates placed on the cost of credit crunch, this seems likely to creep higher, but is still much lower than the cost of doing nothing. In the worst case scenario - or even just the next incremental step because let's be honest, there isn't much of a difference between the first step off the cliff and the second - the costs to the Federal government could be ten times higher.

A horse with no name
The current U.S. predicament is core inflation and GDP growth both running at about a 2.5% pace over last year. For those unlucky few who need to buy gas and food on a regular basis, total inflation is running at twice that pace. Still, this is well short of the near 15% pace of core inflation and 1% Y/Y contraction in U.S. GDP in 1980 that saw the invention of the moniker "stagflation." Nor are there signs inflation will come unhinged in the U.S. to that extent so the "stag" part is much more likely than the "flation." Similarly in Canada, headline inflation is now running at twice the pace of core inflation (3.1% vs. 1.5%). In fact, on a global scale, the most likely scenario is further stagnation in advanced economies and further inflation for emerging markets, with very few of either seeing both on a sustained basis. The U.S. consumer is quickly running out of stimulus checks to spend. In Canada, retail sales for May showed an ongoing sharp deceleration in everything not being bought at a gas station. In Europe, surveys of the manufacturing and service sectors showed sharper than expected decelerations in Q2. The U.K. economy posted its weakest quarterly GDP growth rate in three years in 2008Q2 and is likely to contract before the year is out. And, the pace of exports from Japan and Hong Kong saw precipitous declines in June. So growth is likely to slow in these regions and exert a downward pressure on domestic inflation.


On the other hand, broad-based emerging market resilience and inflation worries remain. The pace of inflation-adjusted retail sales in China is the highest in 12 years. Korea's economic expansion stayed constant in Q2 while inflation remains at a 10-year high. And across the EM universe (or at least averaging 57 EMs), inflation has accelerated from a 5% pace in June 2007 to 12% in June 2008. So while Malaysia this week hiked interest rates for the first time since 2006, and Brazil surprised markets with a larger than expected rate hike, the average pace of inflation across EMs is rising faster than the average interest rate. This is pushing down real interest rates and helping to fuel both faster growth and inflation in these markets. The same is not occurring in advanced economies, with average real rates still above zero in the G-7.

So in the immortal words of the modern philosopher Axl Rose, "Where do we go now?" Sluggish economic growth in advanced economies is likely to keep a lid on growth prospects in EMs, but not unbearably so. Inflation in EMs is likely to place upward pressure on advanced economy inflation, but not uncontrollably so. And we are likely to see more mirages in the desert before we finally find paradise and bring balanced liquidity back to the global economy.

UPCOMING KEY ECONOMIC RELEASES

Canadian Real GDP - May

Release Date: July 31/08
April Result: +0.4% M/M
TD Forecast: +0.2% M/M
Consensus: +0.2% M/M
The Canadian economy appears to have snapped back to life in Q2, following the disappointing 0.3% Q/Q ann. drop in domestic output in Q1. And we expect the economy to grow for a second consecutive month in May with a modest 0.2% M/M increase in output, coming on the heels of the fairly robust rise in GDP in April. The increase in overall economic activity should be on account of the strong performance in real exports and the fairly strong advance in real wholesale sales during the month. The manufacturing sector will also add favourably to economic activity during the month, given the modest increase in real manufacturing shipments. However, despite this cautious revival in economic activity, we expect Canadian GDP growth to remain soft in the coming months as the economy navigates against the challenges of a weakening U.S. economy, a slowing domestic housing sector and a sluggish labour market.

U.S. Real GDP - Q2/08

Release Date: July 31/08
Q1 Result: +1.0% Q/Q ann.
TD Forecast: +2.2% Q/Q
Consensus: +2.0%
The story behind second quarter U.S. GDP was supposed to be the impact of the fiscal stimulus on consumer spending. However, the bump in spending has been somewhat anaemic, resulting in a quarterly number that is likely to disappoint expectations. Durable goods consumption is expected to contract for the second straight quarter, led by a sharp drop in motor-vehicle purchases. Instead, it will be the tremendous strength of exports that will steal the headlines when the advanced estimate for U.S. growth is released. Exports likely contributed close to half of the total growth in the quarter and combined with falling imports will be more than enough to offset weakness in domestic spending. Residential construction will continue to subtract from growth, offset partially by non-residential structures investment that continues to show resilience.

U.S. Nonfarm Payrolls - July

Release Date: August 1/08
June Result: -62K; unemployment rate 5.5%
TD Forecast: -60K; unemployment rate 5.5%
Consensus: -75K; unemployment rate 5.6%
The U.S. economy has lost jobs for six straight months since January with a total of 438K positions being eliminated from the nonfarm payrolls, and the monthly revisions have been consistently downwards. We expect the deterioration in the U.S. labour market to continue at roughly the same pace in July, with a further 60K drop in the employment ranks (following the 62K fall in June). The unemployment rate should hold steady at 5.5%. Indeed, with the sluggishness in the domestic economy and higher input costs, employers are likely to continue economizing on their use of labour services as they contend with the challenge of reduced demand for their products. Needless to say, the weakness in the U.S. labour market continues to be highlighted by the elevated level of jobless claims, though it is important to bear in mind that predicting employment data in July has always been challenging, given the variability of seasonal factory layoffs. Our bias is for nonfarm payrolls to continue deteriorating in the coming months.

U.S. ISM Manufacturing Report - July

Release Date: August 1/08
June Result: 50.2
TD Forecast: 49.0
Consensus: 49.2
We expect the recent surprising upswing in the ISM (in May and June) to be short-lived, with the diffusion index falling back marginally below the 50 threshold in July. Indeed, it is no secret that the U.S. manufacturing sector continues to struggle as it tackles the headwinds coming from the slowing domestic economy and high input costs. Moreover, notwithstanding the natural ebb and flow in this indicator, and the important offsets that have been coming from strong export demand, we expect the long-run general stagnation in the U.S. manufacturing sector to continue in the coming months. If there is a risk to this call it is to the upside, given the strong durable goods orders in June.

TD Bank Financial Group
The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.

READ MORE - The Weekly Bottom Line

Economic Outlook: Unemployment Up in the US

This week's highlights

For the financial markets, the most important economic indicator this week is employment in the US. Employment is one of the indicators used to assess whether the US is in recession, and looking only at the labour market the US is in recession. The following indicators point to this:

• Unemployment has increased by 0.5 percentage point over the past six months which usually only happens in connection with a recession (apart from 1992)
• Private-sector employment has fallen by 0.4% over the past twelve months, and this has not been seen since WWII except when the economy has been in recession
• Notably cyclical sectors such as the manufacturing industry, construction, retail, transportation and business services have cut jobs.

The labour market indicates that there are signs of a mild recession, just like the two previous in 1990/91 and 2001. So far, the unemployment rate has increased by almost 0.1 percentage point a month over the past six months. In comparison, the unemployment rate rose by 0.15 percentage point a month during the recessions in 1990/91 and 2001 and during the more severe recessions in the early 1980s it rose by 0.25 percentage point a month.

Using the moderate rise of 0.1 percentage point as guideline for the future development, the unemployment rate ends the year at 6.1%. A sharper rise of 0.15 percentage point will send the unemployment rate to 6.4%, and a repetition of the development in the early 1980s will result in an unemployment rate close to 7%.

We expect the moderate development to continue, and this means that unemployment for 2008 will end at 6%. This is due to the fact that businesses are in somewhat better shape than usual at the beginning of a recession and that the access to the labour market has slowed down due to the demographic development since the labour force grows at a lower rate. In our view, it will be very unusual if the Fed raises interest rates in this situation.

This week's other highlights

• USA: GDP for Q2, ISM, consumer confidence and house prices
• The euro zone: consumer prices, preliminary
• The UK: PMI Manufacturing
• Japan: industrial production and unemployment

In the course of the week

Germany: consumer prices - July

The German consumer prices rose again in June to 3.3%. The German consumer prices are the first indication of the flash estimate of inflation in the euro zone and will be announced on 31 July. Therefore, the data will attract much attention - considering the ECB's interest-rate announcement on 7 August.

Monday

Japan: unemployment - June

The tight labour market appears to be softening. The unemployment rate was unchanged at 4% in May and confirmed the picture that the fall in unemployment is coming to an end. Moreover, new jobs and vacant jobs per application are on the decline. Economic growth is slowing and profit in the corporate sector is under pressure from the high oil and commodity prices, for instance, which influence the labour market. We expect the unemployment rate to remain around 4% in June since initially businesses will react by reducing bonus payments rather than cutting jobs.

Tuesday

USA: house prices from Case/Shiller - May

There are various measurements of house prices in the US. Case/Shiller measures the price development of homes in the large cities. That is why Case/Shiller often increases/falls more than the entire housing market. In April house prices had fallen by 15.3% over the past twelve months, which is the sharpest fall since the start of the data collection (1988). It is cause for concern that the fall in house prices has accelerated lately. If it is measured in terms of a three-month period and compared with the preceding three months and in y/y terms, the fall is 22%.

We expect a further fall in house prices in May.

USA: consumer confidence - July

Consumer confidence as reported by the Conference Board is usually the most important consumer confidence indicator. Consumer confidence has declined by almost 55 points over the past 12 months, which is the largest fall ever (1968). This reflects the fact that consumers are very much under pressure from falling employment, rising unemployment, high petrol and food rises, falling house prices and equity prices as well as lower wage increases.

Consumer confidence is expected to be affected by the following factors:

• the crisis involving Fannie Mae and Freddie Mac has not added to the optimism
• employment fell again in June and in the previous months
• the Department of the Treasury is almost done sending out cheques with tax cuts
• the turmoil in the financial markets has picked up again and equity prices have fallen
• mortgage rates have increased significantly since mid-March
• petrol prices have increased further
• the other consumer confidence indicators, ABC and Uni. of Michigan, have in fact risen a little after what can be characterised as a sharp fall.

We expect a small fall in consumer confidence in July since consumer confidence has already fallen considerably, i.e. the majority of the bad news has already been discounted.

There will also be focus on consumers' assessment of the labour-market situation through their assessment of 'how difficult it is to get a new job' and 'plenty of new jobs'. These assessments are expected to show that consumers have grown even more pessimistic due to the rise in unemployment.

Japan: industrial production - June

Industrial production grows at a slower pace. In May it grew by 1.2% y/y and the year on year rise for the past three months is 0.8%. We expect the slower global and Japanese activity to be increasingly reflected in the forwardlooking economic indicators such as PMI which shows that new orders are on the decline and stocks are accumulated.

Thursday

USA: GDP - Q2

GDP is also one of the important economic indictors this week. GDP is the total production of goods and services in the US and the best indicator of the development in the economy. GDP is often used as a measurement of whether the economy is in recession. In Q1, GDP rose by 1% after a rise of 0.6% in Q4. Although there are prospects of stronger growth in Q2, it is not a sign that the risk of recession has disappeared.

Growth was driven up by consumer spending and notably the tax cuts. They lifted consumer spending by 0.5% in the first two months of Q2 compared with Q1. In terms of retail sales, consumer spending was weak in June, but services which are not included in retail sales are expected to pull up consumer spending. We therefore expect consumer spending to grow by somewhat more than the 1.1% in Q1.

Net exports (exports minus imports) contributed strongly to growth over the past four quarters and the prospects are also good for Q2. Exports have significantly outperformed imports in the two first months of the quarter, and this may cause growth to rise by up to 1 percentage point.

The indicators of corporate investment point to a rise as the sale of investment goods increased in the first two months. On the other hand, businesses have cut jobs, which is often seen together with a fall in investment.

Housing investment which has driven down growth by an average of 1 percentage point since Q2 2006 will also drive down growth in the second quarter. The drag on GDP growth by housing investment is expected to fall during the rest of the year, which is reflected in a more moderate fall in residential construction.

The largest element of uncertainty is inventory investment. The businesses have not increased the production although the demand from consumers has been boosted by the tax cuts. This indicates that businesses have met a large part of the demand by drawing on inventories. A fall in inventories pulls down GDP growth, and this factor increases the uncertainty about growth considerably.

All in all, we expect growth to be slightly above 2% in Q2. On the other hand, there are prospects that growth will fall in Q3.

The GDP data comprise the Fed's preferred inflation indicator, the personal consumption expenditure deflator ex. food and energy. It rose by 2.3% in the first quarter.

USA: labour costs - Q2

The employment cost index is the Fed's preferred indicator of the inflationary pressure from the labour market. It will be a significant signal if the rate of increase of labour costs falls. When labour costs are so significant it is because they account for two thirds of companies' total costs and thus extensively determine the development in companies' total costs. Wages account for 70% of labour costs while the rest pays for social security, pension, sickness, leave, etc.

The increase in labour costs in the private sector slowed a little from Q4 to Q1. This was mainly due to a fall in other staff costs whereas the proportion of wages actually rose. Since the wage rises in, e.g., the labour market report have slowed solidly, we expect labour costs to rise at a more modest pace. In Q1 they rose at 0.7% (Q4: 0.8%).

The euro zone: consumer prices - July

Consumer prices are high and much too high for the liking of the ECB. Moreover, the high rate of inflation is deadly to growth in consumer spending since it erodes households' purchasing power. In June, inflation rose to 4.0 % y/y. We expect inflation for July to be a tad higher or at the same level.

The UK: house prices - July

According to Nationwide, house prices have been falling for the past eight months. The fall in June was 0.9% m/m. That reduced the rate of increase to -6.3% y/y, the biggest fall since 1992.

We expect the housing market to be soft for some months yet, with house prices falling further. The ratio between house sales and the stock of unsold houses in the RICS survey - which is a good indicator of future house prices - is still falling, and the number of mortgage loans has fallen to an all-time low since the start of the series in 1993. The number of deals is very low, and this indicates that the tight credit conditions are inducing many potential house buyers to stay out of the market.

Friday

The US: employment - July

Employment is usually the most important indicator for the financial markets. The employment data give a good indication of the state of the economy, although there has been some discrepancy between the picture painted by the employment data and GDP lately.

As evident from this week's highlight, the economy is in recession judging by the labour market, although the recession looks fairly moderate. Employment has fallen by 73,000 a month over the past six months, and a look at private employment in particular shows that private employment has done worse than that, recording a fall of 93,000 a month.

We expect the employment situation to deteriorate over coming months. This is corroborated by the fact that most indicators signal a sharper fall in employment. We expect a fall in employment of about 80,000 in June, but we still await a number of indicators which are not released until next week.

Jobless claims fell by 16,000 between the two collection weeks (when employment data are collected). The level points to a small fall in employment. ISM's index of employment in the manufacturing industry fell sharply, to 43.7, and this signals that the number of workers laid off in the manufacturing industry is rising (by about -100,000 a month). ISM's index of employment in the service sector also fell sharply in June, to 43.8. That indicates a massive fall in employment in the service sector, but indicators are somewhat volatile, so you should not overinterpret this signal. The weighted employment index of the ISMs points to a fall of 125,000 in employment. The indices of vacancy ads in newspapers and on the internet have fallen further. In the construction sector, employment has fallen, but construction has fallen more sharply still. In our view, there is a surplus of 300,000 skilled workers in the residential construction sector.

Overall, we expect a total fall in employment of 90,000. You should also remember the reviews of employment made for the two preceding months. The latest revisions have all been downward, as was the case during the recession in 2001.

Because of the interest in inflation, there is also focus on developments in wages. Wages rose by 0.3% from May to June and by 3.4% y/y. The general rise in unemployment is expected to lead to a lower rate of wage increase and hence to weakening inflationary pressure from the labour market.

The US: ISM Manufacturing - July

ISM is the nationwide sentiment indicator for the manufacturing industry and gives a reasonable indication of the development in industrial production and GDP. What the financial markets will be looking at this time is whether the ISM falls like the European sentiment indicators. In June, ISM rose from 49.6 to 50.2, which indicates unchanged activity in the manufacturing industry.

We expect a fall in ISM in July due to the following:

• Our ISM indicator signals that ISM may fall by a few points, to 47, in July.
• The turmoil in the financial markets may pull ISM down.
• The sentiment index of small businesses has fallen considerably more than has ISM. They are notably bearish about sales.
• New orders in the manufacturing industry have risen robustly since February. However, the rise is to some extent due to price rises.

The fall in oil prices may calm down the corporate sector.

In addition to the index, focus will be on new orders, employment and the price index. The price index in particular, which rose in June to 92, the highest level since 1980, will attract a good deal of attention. Given the fall in oil prices, the price index may fall.

The US: car sales - July

Factory car sales are interesting, because the number has fallen drastically. Sales in June were as low as 13.6m, the lowest they have been since August 1993). Q2 sales 2007 were 16m. There are no prospects of improvement for the short term, and we expect another fall in July.

The fall in car sales was due to the high petrol prices (above USD 4 a gallon) which have already prompted Americans to reduce their driving. Another factor that pulls down car sales is the fact that consumers under pressure from, e.g., lower employment, higher unemployment, slowing wage rises and lower house prices, will postpone buying durable consumer goods including cars.

According to a manager at Ford, there are prospects of a further fall in sales n July. Notably the American car producers are hit hard by the rising petrol prices and the tighter credit standards.

The UK: PMI Manufacturing - July

The sentiment indicator of the manufacturing industry fell sharply in June and has been below 50 for the past two months, which indicates a setback in the sector. The PMI index is now the lowest it has been since the beginning of 2002. The sub-indices of production, new orders and employment have all fallen significantly, whereas the price indices are rising and are now the highest they have been since the series started. This means that there are prospects of a setback for the manufacturing industry at the same time as mounting inflationary pressure. We expect PMI to remain week over the coming months.

Sweden: GDP - Q2

The Swedish economy is slowing down. GDP rose in Q1 2008 by 0.4% q/q, the lowest rate of growth since mid-2003. In addition to slower growth in consumer spending, also inventories pulled down growth, and there was a fall in public investments. We expect the growth rate to remain moderate in Q2 (at around 0.3%-0.5% q/q) due to the global economic slowdown and the fall in domestic demand.

Households are under pressure because the rising inflation rate erodes the purchasing power, and the weaker data for retail sales and consumer confidence in May and June indicate a slowdown in private consumption. In conjunction with lower expectations of exports, this means that there are prospects of companies toning down their investment plans from the existing robust level. This is also reflected in the business confidence indicators, and the rate of increase of new orders - for the domestic market as well as the export market - has fallen significantly. On the other hand, we expect public investments to swing back into positive territory after the fall in Q1.

Jyske Markets - FX Research
http://www.jyskebank.dk/finansnyt

The analysis is based on information which Jyske Bank finds reliable, but Jyske Bank does not assume any responsibility for the correctness of the material nor for transactions made on the basis of the information or the estimates of the analysis. The estimates and recommendation of the analysis may be changed without notice.

READ MORE - Economic Outlook: Unemployment Up in the US

Weekly Market Commentary

Overview

Equity indices' 'relief rally' fizzled out mid-week as they continue to grapple with pivotal chart levels. Most are now slightly lower than where they started and Brazil's Bovespa has lost over 20% since June's record high. The US dollar strengthened marginally, and especially against the Czech koruna because Vice-governor Hampl said, 'the crown recently has become unhinged…(and) is one of the things influencing the behaviour of the central bank'. The Mexican peso strengthened to 10.00 per greenback, the strongest since November 2002, as the overnight lending rate was raised by another 25 basis points to 8.00% (to fight inflation running at 5.26%). Likewise Brazil +75 basis points to 13.00% and inflation 6.3%. Most commodities are lower, dragged downed by Crude Oil and Natural Gas. Interest rates are very mixed and moving to different dynamics. Most Treasury yields are lower and the Reserve Bank of New Zealand trimmed the Official Cash Rate by 25 basis points to 8.00%.

Political and Economic Developments

Tough times for Britain, we know, and now it's official. Retail Sales collapsed -3.9% in June, the biggest slump since records began in 1986, reversing sunny May's +3.6% leap. Clothing and footwear, the usual victims, suffered badly but interestingly food sales crashed a record -3.6% although the value of retail sales at £5.1B is +3.4% higher than a year ago: spend more get less, great! The Grocer magazine reported that sliced white break and white potato sales are markedly higher, suggesting chip butties all round is the Brits' idea of belt-tightening. Q2 GDP was just +0.2% Q/Q and +1.6% Y/Y, a sharp reduction from Q1's +2.3%. The National Institute of Economic and Social Research predicts it will be +1.5% in 2008 and +1.4% for 2009, well under the 3.1% rate in 2007 and the lowest since Q4 1992. And they suggest a rate hike to tame inflation (potentially killing off the economy too). The number of mortgage approvals are the lowest since January 1996.

Germany is not immune with August's IFO Business Sentiment Index seeing its biggest drop since 9/11/2001. Danish Consumer Confidence is at a 16-year low and the Eurozone's Composite PMI is at a record low at 47.8. Japanese exports unexpectedly shrank for the first time in five years and the Bank of Japan accepts that the country might slip in to a shallow recession because consumer spending would not make up for this decline.

Underlying Themes

The average US home costs $215,000, down 6.1% from this time last year. Foreclosures are +14% in Q2 from Q1, amounting to 739,714 properties, and 121% higher than Q2 2007. These properties, with prices dramatically slashed, account for between 30% and 40% of all June Existing Home Sales. California and Florida were the highest by volume but Nevada, where on in every 43 households received a foreclosure filing in Q2, holds the dubious distinction of the record ratio. Government owned Ginnie Mae, whose share of the mortgage markets has increased from 8% to 20% in 12 months, has lent and securitised $3 billion worth of 'jumbo mortgages' (between $363K and 730K a piece) since the program began in April. To who? On what? Where? Why buy now?

What to watch for next week

A general election in Cambodia on Sunday and July CPI for the different German states due from this day. Monday just UK June Nationwide House Prices and German August GfK Consumer Confidence. Tuesday Japan June Jobless, Household Spending and Retail Sales, UK Consumer Credit and US July Consumer Confidence. Wednesday Japan June Industrial Production, July Small Business Confidence, German June Retail Sales and Eurozone July Business Climate. Thursday Japan June Labour Cash Earnings and Housing Starts, UK July GfK Consumer Confidence and German Unemployment. Then EZ15 June Unemployment and July CPI, US Q2 GDP, Core PCE, June Help Wanted Index and July Chicago Purchasing Managers. Friday the 1st August July Manufacturing PMI's for various European countries, US June Construction Spending, July Manufacturing ISM, Non-farm Payrolls and Unemployment. Saturday a referendum in Latvia on proposed changes to the constitution.

Positioning and Technical Analysis

Thinning markets as we approach August summer holidays and Beijing's Olympics. Allow for another week or two where equity indices trade nervously around these key chart levels. Here, and in a whole range of financial markets, intra-day and weekly prices moves are likely to get bigger and implied volatility higher. Vacations are only part of the story though. Scarce cash means less money for trading; fear of losses encourages super tight stops; a raid on savings to smaller investment pots. When some shares are priced at just one tenth of their peak value, they behave like 'penny stocks'. The media as always terribly quick to point out that A was up 12% that day, or B down 20% the next, and so on. We question whether this sort of instrument should be included at all in a sensible, defensive, investment strategy. The next dilemma is where exactly interest rates should be in the fight between opposing forces: inflation and recession. Getting this right is key, and doing nothing is not necessarily an option. The fragility of the current situation means the slightest miscalculation could topple everything, with dramatic consequences. We doubt the authorities have the necessary skills and tools to walk this tightrope. They also do not have deep pockets.
Have a nice weekend!
Mizuho Corporate Bank
Disclaimer
The information contained in this paper is based on or derived from information generally available to the public from sources believed to be reliable. No representation or warranty is made or implied that it is accurate or complete. Any opinions expressed in this paper are subject to change without notice. This paper has been prepared solely for information purposes and if so decided, for private circulation and does not constitute any solicitation to buy or sell any instrument, or to engage in any trading strategy.

READ MORE - Weekly Market Commentary

Can Dollar Rally Continue?

Weekly Analysis of the Majors - Can Dollar Rally Continue?

Talking Points

The US Dollar $ - Can Dollar Rally Continue?

'Is the worst behind us?' we asked last week. 'If crude continues to drip lower, ' we concluded ,'it could provide yet another reason for a dollar counter trend rally.' With oil falling below $125/bbl by end of trade Friday, the massive sigh of relief from dollar bulls could be heard around the world. As a result, the greenback picked up more than 100 points on the euro by end of the week although the US economic data was mixed at best.
Housing continued to be a problem as Existing Homes plunged -2.6% versus -0.1% projected and LEI data printed negative for 7th out of the past 9 months. However by Friday US economic data actually proved supportive with U of M survey jumping back to the 60 level and Durable Goods registering a surprise increase 0.8% versus forecasts of a -0.3% decline. Furthermore as we noted in our Friday note, 'with markets already so preconditioned to bad economic news from the U.S., the greenback may not weaken much further unless the data shows substantial deterioration from the prior month.'
With the greenback clearly stabilized for now, the question forward is can the rally continue? The answer as is so often the case may depend on the NFPs'. The front of the week may actually prove dollar positive as flash GDP for Q2 could show surprising strength of 2% versus only 1% the quarter prior. However, the labor data holds the key. If NFPs surprise to the downside, most importantly breaking the -100K barrier, dollar longs will be hard pressed to rally the unit as expectations of a severe slowdown in the second half of the year will only harden the view of the bears that the worst lies ahead. -BS

The Euro € - No Tumble Despite Trouble

On Thursday night after the IFO numbers were released we noted, 'The IFO survey of German consumer confidence fell to a three year low piercing through the psychologically key 100 figure as it printed at 97.5 versus forecasts of 100.1. Sentiment has turned sharply lower as the German economy has finally succumbed to the triple punch combination of higher oil prices, higher interest rates and higher exchange rates.
Germany has been the primary driver of growth in the EZ and tonight's data bodes badly for the region as a whole. Earlier in the night markets saw a big plunge in French business confidence and a much larger uptick in Spanish unemployment to 10.4% indicating that the environment in the rest of the 15 member union is even worse. Given such rapidly deteriorating economic conditions its is difficult to imagine that the ECB would be willing to tighten further and risk tipping the worlds largest economic zone into a full blown recession.'
Surprisingly enough however, the EURUSD held up relatively well as the unit continues to attract safe haven flows. This appears to be the single currency's only source of strength, but for the being that may be enough to maintain the 1.55-1.60 range. The European economic calendar is relatively subdued next week with German Retail Sales and CPI estimates the only two events of note. The consumer in the region's largest economy is likely to show further weakening, but the key report may be the inflation numbers. If they jump above 4% as projected, expect more hawkish rhetoric from the ECB which could lend support to the pair. - BS

The Japanese Yen ¥ - After Yield Forecasts Curb A Carry Breakout Can USDJPY Push 108.50?

Like many of its major counterparts, USDJPY passed another week without deciding a dominate trend. Even more frustrating was the fact that a long-term buildup by the pair for a momentous breakout (in an ascending wedge) was completely deflated by a false breakouts over the past two weeks. Nevertheless, there are still key levels that still stand against the market finding a dominate direction (namely 108.50 to the upside and 104 for bears). Effectively, the quickly faded breakouts and ongoing congestion is a strong reflection of the fundamentals underlying the pair. This past week, risk appetite and carry interest were buoyed by second quarter earnings and write downs that were better than the market's severely depressed forecasts (though they were still very disappointing numbers). However, 108.00 has held out for USDJPY, and the DailyFX Carry Trade Index has pulled back from resistance, due to concerns that the outlook for yields may not compensate traders for the threat of high volatility. Such apprehension was catalyzed by the surprise RBNZ rate cut. While interest rate expectations have long forecasted a spurt of policy tightening for key low yielders (USD, EUR, CHF) and relatively staid projections for the other end of the spectrum (GBP, AUD, NZD), few were prepared to actually see differentials start to contract. As long as there are credible fears over credit and financial market conditions (not to mention the drop in capital markets), risk appetite will be a guided by expectations for returns.
Elsewhere, the economic docket was dotted by a few notable indicators that have set the tone for the health of the Japanese economy. For the first half of the week, the May All Industry Activity Index and physical trade balance for the following month added a fundamental edge to price action. The activity gauge rose for a third consecutive month, but the market's reaction was modest as most of the indicator's components were known well in advance. The smallest trade surplus in five months was a little more influential though as exports actually fell for the first time in four years - suggesting the export dependent economy could be in significant trouble with the global slowdown. Top scheduled event risk was read in the national CPI numbers for June though. Headline inflation jumped to a decade high 2.0 percent clip while even the core figure (excluding food and energy prices) was just off a 10-year high after finally crossing back above 0.0 percent.
As the coming days burn on, we will once again see little interest in the fundamental direction of the Japanese economy, though employment, household spending, consumer wages, housing and retail sales data makes for a good mix. Instead, the greatest potential for finding direction will once again fall to the meanderings of general risk sentiment and the carry trade. Second quarter earnings is essentially behind us and the Fannie/Freddie issue has more or less faded into the background. This week, the real driver for risk trends is the US data (2Q GDP, NFPs) which will act as a benchmark for global growth and thereby a barometer for monetary policy. - JK

The British Pound ₤ - Cable Keeps its Cool

The economic data form UK provided little cause for celebration as virtually all of the releases disappointed to the downside. Most notably Retail Sales dropped by 3.9% versus -2.6% expected as purchases of apparel and food declined markedly. The UK consumer is clearly feeling pinched and although the BoE monetary policy is unlikely to ease before the year end, the situation on the street is becoming more troubling by the day as demand continues to contract. As we stated in our note on Thursday, 'If the recent drop in oil prices provides a boost to spending in the fall then BoE will maintain its neutral stance. However if conditions worsen materially Mr. King and company may have to take Mr. Blanchflower's advice and lower rates quickly.'
Yet the key reason that cable displayed relative strength last week was precisely because the MPC minutes revealed a much more hawkish slat than most market participants expected. Instead of voting 8-1 to keep rates steady, the actual vote turned out to be 7-1-1 with one member voting to hike the. According to Ifrmarkets, ''Tim Besley unexpectedly voted for a 25bps hike on the grounds the BOE credibility is suffering a great deal due to overshooting inflation, and a rate hike now would help restore its reputation.'
The BoE therefore remains surprisingly stubborn in its attitude towards monetary policy but if as expected next week's data shows a continuing contraction in economic activity, the pressure on Mr. King and company to ease before the year end is likely to rise. We remain convinced that cable's 5% yield is vulnerable to a cut and therefore the 2.0000 level continues to form a relatively stiff resistance in the pair.- BS

The Swiss Franc ₣ - Inflation May Decide The Fate Of The Franc Next Week

The Swiss Franc would significantly weaken throughout the week as risk appetite increased on the back of comments from U.S. Treasury Secretary Hank Paulson and Philadelphia Fed President Charles Plosser. Paulson's reiteration of the importance of strong support from the government of the GSE's would lead to Congress passing the bill to provide a line of credit to the beleaguered GSE's. Plosser would immediately follow those comments with prepared remarks warning that U.S. monetary policy is too accommodative at present and must be adjusted prior to an economic turnaround fully taking hold or the US risks both increasing inflationary pressures and a crisis of confidence in the Federal Reserve. The remarks would spark broad based bullish dollar sentiment as markets re-priced interest rate expectations, ultimately rallying the pair over a 100 points. USDCHF would end the week rising above the 1.04 handle on the strength of a considerable improvement in U.S. Durable Goods Orders, before finding resistance
The Swiss economic docket provided very little impact on the currency's price action despite a trade report showing weakening domestic demand. The Swiss trade balance surplus widened to a record high of 2.141 billion, as demand from Asian markets offset slumping orders from the U.S. and Europe. However, declining demand fro imports demonstrates the weakening demand from consumers, who continue to see their purchasing power diminish as inflation has risen to 2.9%- the highest in 15 years. Producer and import prices rose to the highest level in 19 years rising to 4.5% following 3.9% in May, signaling that consumer prices may continue to accelerate.
Next week's calendar will provide insight into the level of inflationary pressures and its affect on consumer consumption. Indeed, Swiss consumer prices are expected to rise to 3.0% from 2.9%, as producers pass on the costs of increasing energy and raw materials. Despite , rising costs consumers have remained resilient with retail sales rebounding in May, the UBS consumption indicator will signal if demand will continue to remain firm or succumb to increasing costs. The KOF leading indicator is expected to show that the economic outlook I dimming as producers contend with slowing demand from their main trading partners. The Swiss Franc will be subject the prevailing risk sentiment which has been generating momentum with several U.S. banks reporting smaller write-downs than expected. However, many industry insiders are still expecting further fallout from the subprime crisis, which would send the pair lower. Technically the USDCHF is expected to see significant resistance until the 200 Day SMA at 104.06, which it may take aim at with continued positive earnings and the absence of credit concerns - JR

The CAD - Canadian Dollar Eyes Make-or-Break Week Ahead

Disappointments in key Canadian economic data pushed the domestic currency lower against the US dollar for the second consecutive week of trading. An ostensibly positive result in Canadian Retail Sales figures fell below analysts' bullish forecasts, and the CAD tumbled as a result. Statistics Canada reported that headline Retail spending rose 0.4 percent through the month of May-its third consecutive monthly advance. Yet the underlying picture clearly showed that the improvement in sales came on sharp rises in gasoline costs-gasoline station sales surged 2.4 percent through the period. When adjusted for prices, Retail Sales only gained 0.1 percent and year-over-year gains fell to their lowest since January, 2004.
Energy price gains likewise made their way into the most recent Consumer Price Index figures, as the headline domestic inflation rate surged to its highest in 3 years at 3.1 percent. Yet the more important Bank of Canada Core CPI figure actually remained nearly unchanged at 1.5 percent and reinforced opinions that the BoC would leave rates unchanged through the medium term. The central bank explicitly targets a Core CPI rate between 1 and 3 percent, and an inflation rate towards the lower end of its band leaves officials in a somewhat-comfortable position to leave rates as-is. It will be important to watch whether such strong headline price gains seep into the typically stable Core CPI number; the future of Canadian interest rates will depend on inflation expectations.
The week ahead will do little to clarify inflation outlook for the world's eighth largest economy, but monthly Gross Domestic Product figures will combine with an incredibly packed US economic calendar to force major volatility out of the USDCAD. Highly-anticipated US Consumer Confidence, 2nd Quarter GDP, and Nonfarm Payrolls reports are all due within a three day span-virtually guaranteeing sharp moves in US dollar pairs. Traders will clearly monitor any surprises out of forthcoming North American economic data releases; such a confluence of major news could be just what traders need to force the USDCAD out of its multi-month trading channel. - DR

The AUD - US Dollar Sentiment to Drive the Aussie Once Again

Last week, a dual set of inflation metrics offered encouraging news to the Reserve Bank of Australia. Producer Prices eased to 4.7% in the year to the second quarter versus 5.3% expected, marking the first decline since June 2007. A conflicting report showing higher-than-expected second quarter Consumer Prices (4.5% versus 4.3% expected) failed to buoy AUDUSD the following day. This makes sense: Producer Prices is the more forward-looking of the two metrics because it takes time for producers to pass on higher production costs by charging more for finished goods. Lower producer prices in the second quarter point to an easing in consumer costs and thereby the overall inflation level in the third, making second-quarter consumer prices largely irrelevant. In the broad scheme of things, it appears RBA policy rates are indeed creating the desired disinflation that Glenn Stevens and company had hoped for. The week was rounded out with June's New Motor Vehicle Sales. We had suggested sales were 'to extend their current downtrend: high borrowing costs make cars difficult to afford while rising petrol prices make them expensive to operate.' Sure enough, the metric printed at 1.4% in the year to June, a 16-month low. On balance, the data failed to produce any meaningful impact on the AUDUSD. In forecasting last week's developments, we concluded that 'with few changes likely on the horizon in the broad macro picture of the Australian economy, AUDUSD may once again find itself trading squarely on US dollar sentiment.' This, it seems, is precisely what has happened.
Looking ahead, Australian data appears destined to follow a predictable pattern this week. June's New Home Sales figures will likely decline again having dropped -5.0% in May as deteriorating growth prospects and high borrowing costs deter consumers from committing to big-ticket purchases. Building Approvals will follow suit, with forecasts calling for an annualized decline of -4.1%. The Trade Balance may offer the single piece of silver lining to the week's otherwise dismal showing as the deficit is expected to contract to -A$100 million in June versus -A$965 million in the preceding period. May's reading was heavily skewed by a 17% rise in fuel imports as oil prices continued to soar. Imports may have eased a bit in June as consumers take stock of deteriorating economic conditions and pare back on expenses. Indeed, Westpac's measure of consumer confidence dropped -5.7% in June versus 2.7% in May. While this likely spells improvement for the trade deficit, it will mean decline for June's Retail Sales result: the headline figure is to print flat at 0.0% having grown 0.7% in May. All told, we do not expect the macro picture to deviate from established themes, meaning AUDUSD will yield to US dollar sentiment again. - IS

The NZD - Kiwi Selling To Continue As Data Heads Further South

Last week started off slow for New Zealand data as June's Credit Card Spending and Visitor Arrivals data validated our forecasts: the former metric fell to 3.3% from 5.9% in the preceding month, while the latter collapsed into negative territory to print at -1.4% versus a revised 9.1% in the previous period. We had reported that credit card receipts are 'sure to continue downward as Kiwi consumers tighten their belts amid deepening economic malaise. [Further,] while the recent weakness in the Kiwi dollar may have otherwise helped June's Visitor Arrivals, tourism surely contracted as the global slowdown takes its toll on discretionary spending the world over.'
The undisputable center-piece of the week was a surprise from the Reserve Bank of New Zealand. The deepening recession moved policymakers to cut interest rates by 25 basis points, putting benchmark borrowing costs at 8.00%. This is the first RBNZ rate cut since 2003. The accompanying release cited greater-than-expected risks to growth and tightening international credit conditions as primary catalysts for the decision. Borrowing a page from Australia's playbook, Governor Alan Bollard said that monetary policy has been 'reasonably tight for some time, and is now restraining activity and medium-term inflation pressures.' Bollard added that although recent spikes in oil and food prices will bring inflation to a peak near 5% this year, the slowing economy will act to bring price pressure to target levels in the medium term. Shaping expectations in a typically candid fashion, Bollard concluded by saying that 'provided that the outlook for inflation continues to improve and there is no excessive exchange rate depreciation, we would expect to lower the OCR further.' The Kiwi dollar responded sharply, dropping 82 pips in the first 10 minutes and continuing lower for the remainder of the week.
This week is unlikely offer anything to curtail the vigor of Kiwi bears. The Trade Balance will likely deteriorate: Oil prices continued higher in June, inflating the cost of imports while a drought likely cut into farm production to depress export volumes. Expectations call for a deficit of -NZ$350 million versus -NZ$195.8 million in May. July's edition of NBNZ Business Confidence is will almost certainly continue lower as an end to New Zealand's economic malaise is far from near. - IS

DailyFX
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READ MORE - Can Dollar Rally Continue?

US Currency Outlook -- Forex Currency Pairs

July 26, 2008

Forex Forecast of Major Currency Pairs

The Global-View.com Month Ahead Currency Outlook is prepared weekly by the trading professionals at GVI Forex. For information on the GVI Forex Service Click Here

At the end of week before last, it had appeared that the tone of the USD was starting to improve. It was looking a bit shakier at the start of the latest week, but then turned higher as the price of oil started to tumble. Markets feel that falling energy prices could take the pressure off key central banks, especially the ECB, to pursue a restrictive monetary policy. A less restrictive ECB could provide the USD with room to improve vs. the EUR. Recent economic data from the Eurozone suggest that the EZ economy has started to slow dramatically. This is best illustrated by the July German IFO survey data and the latest Eurozone manufacturing PMI data (both below).

It is notable that the USD survived the bail out of two massive GSE�s (Government Supported Enterprises). Fannie Mae and Freddie Mac have assets on the order of $5tln, that the government has been forced to guarantee. Although the credit crisis is by no means over, it appears that it has started to subside as a market factor. Odds are that concerns will continue to resurface periodically.

For now, the lead EUR/USD looks still to be mired in a trading range. At present levels, the EUR/USD is still fairly distant from the 1.5500 market neutrality level.

Click on chart for two year history



In Japan, no changes in monetary policy are in store for the near term. There is no pressure for higher interest rates from the BOJ. The economy is presenting a more negative picture presently. No major shifts in the spread in the 2-yr bond spread between Japan and the U.S. is likely anytime soon. There was some market chatter about possible coordinated intervention in the EUR/JPY cross, but such speculation has dismissed by market professionals.

Click on chart for two year history

The U.S. and Eurozone economies have been slowing. The U.S. is much further along in the process. Note below in the U.S. Monetary Policy outlook insert that official U.S. rates have reached a floor.

UNITED STATES

GVI U.S. Feberal Reserve Bank Policy Meeting Preview Decision: August 5 at 18:15 GMT. Fed Funds rate: 2.00% Expected Decision: No rate change Short-term market sentiment contnues to exert a strong infuence on Fed policy decisions. On Wednesday June 25, the central bank held its fed funds target steady at 2.00%. The policy statement disappointed the markets because it did not clearly signal a policy tightening. Future policy decisions now will be data-dependent. FEDERAL RESERVE Policy Objective: The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates. The chart above shows year/year core PCE for the U.S. relative to its its reported "comfort zone for this key price index. Headline and Core CPI figures are also shown.

The above monthly U.S. employment chart is included because its the most closely followed data release each month, and because one of the objectives of the Fed is to maximize employment.

The chart above shows the current three month libor rate, the current Fed funds target and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago. The chart provides a view on where the markets feel U.S. interest rates are headed.

The chart above shows the U.S. Fed Funds rate target, three month libor, and two- and ten-year bond yields over the past twelve months.

Major Currency Pairs - Currency Forecasts- Monthly Perspective

The ECB has indicated that monetary policy has moved into a tightening phase due to inflationary pressures (see policy insert below). The ECB remains fixated on its anti-inflation mandate to the chagrin of key politicians.

EUROZONE

GVI European Central Bank Policy Meeting Preview Decision: August 7, 2008 at 11:45 GMT. ECB Refi rate: 4.00% Expected Decision: High risk of +25bp rate hike. ECB President Trichet signaled the rate hike in July after the June ECB governing council meeting. Policy is now on hold as the central bank awits upcoming data. Key Eurozone PMI figures, which correlate well with GDP, are pointing to a developing economic slowdown. ECB Policy Objective: The primary objective of the ECB's monetary policy is to maintain price stability. The ECB aims at inflation rates of below, but close to, 2% over the medium term. The chart above shows year/year HICP (Harmonized CPI) for the Eurozone relatrive to its "below 2%" target level.

The chart above shows the current three month libor rate, the current ECB "refi" rate target and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago. The chart provides a view on where the markets feel Eurozone interest rates are headed.

The chart above shows the ECB refi rate target, three month libor, and two- and ten-year bond yields over the past twelve months.

The Japanese economy is in a mixed state with inflation finally starting to show up in key price indices. Tokyo would not be unhappy with a weakening JPY.

JAPAN

GVI BOJ Policy Meeting Preview Decision: July 15, 2008 Current Overnight Target Rate: 0.50% Expected decision: No change. Speculation about a future BOJ rate cut abounds. The economy has started to turn more mixed. The political situation also is unstable. BANK OF JAPAN Policy Objective: The Bank of Japan Law states that the Bank's monetary policy should be "aimed at, through the pursuit of price stability, contributing to the sound development of the national economy." The chart above shows year/year core nationwide CPI and the reported BOJ goal of between 0% and 2% for this price index.

The chart above shows the current three month libor rate, the current BOJ overnight rate target and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago. The chart provides a view on where the markets feel Japanese interest rates are headed.

The chart above shows the Japanese overnight rate target, three month libor, and two- and ten-year bond yields over the past twelve months.

The BOE cut rates at its April meeting as expected. Future rate reductions are now on hold due to inflationary pressures. Odds are the BOE policy is now on hold until yearend. The GBP had been under relative pressure due to worries about a sharply deteriorating economy.

UNITED KINGDOM

GVI Bank of England Policy Meeting Preview Decision: August 7, 2008 at 11:00 GMT. BOE Repo Rate: 5.00% Expected Decision: No change. BOE policy makers continue to balance concerns about inflation against the risk of a slowing economy. Note below that both the U.K. Manufacturing and Services PMIs have turned south. Inflation data are a worry and will prevent any ease in the near future. BANK OF ENGLAND Policy Objective: The Bank's monetary policy objective is to deliver price stability, low inflation, and, subject to that, to support the Government's economic objectives including those for growth and employment. Price stability is defined by the Government's inflation target of 2%. The chart above shows year/year CPI for the U.K. relative to its 2% target for this key price index.

The chart above shows the current three month libor rate, the current Repo Rate and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago. The chart provides a view on where the markets feel U.K. interest rates are headed.

The chart above shows the U.K. repo rate target, three month libor, and two- and ten-year bond yields over the past twelve months.

The Swiss National Bank tries to maintain a stable relationship of the CHF vs. the EUR. It is never pleased with weakness of the CHF against the EUR and could raise rates in response to an ECB policy tightening.

SWITZERLAND

GVI Swiss National Bank Policy Meeting Preview Decision: June 19 at 08:30 GMT. SNB 3mo Swiss libor target: 2.75% Expected Decision: Risk of +25bp The SNB had indicated that the peak in interest rates had been reached. However, intensifying inflationary pressures and a probable ECB rate hike in early July could tip the scale to higher rates. The Swiss CPI (see below) is well above its target ceiling of 2.0%. The SNB manages the value of the CHF as critical element of monetary poilcy. SWISS NATIONAL BANK Policy Objective: The National Bank equates price stability with a rise in the national consumer price index (CPI) of less than 2% per annum. In so doing, it takes account of the fact that not every price movement is necessarily inflationary. Furthermore, it believes that inflation cannot be measured accurately. Measurement problems arise, for example, when the quality of goods and services improves. Such changes are not properly accounted for in the CPI; as a result, inflation, as measured by the CPI, will be slightly overstated. The chart above shows year/year CPI and the Swiss goal of less than 2% for this price index.

The chart above shows the current three month libor rate, the current three-month Euro-Swiss target and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago. The chart provides a view on where the markets feel Swiss interest rates are headed.

The chart above shows the Swiss three-month Euro-swiss rate target, three month libor, and two- and ten-year bond yields over the past twelve months.

The Australian economy is clearly starting to slow. A key focus for the Reserve Bank of Australia remains above target inflation, plus strong employment and commodity demand. This has kept the AUD underpinned. The Reserve Bank of Australia is still trying to rein in price pressures.

AUSTRALIA

GVI Reserve Bank of Australia Policy Meeting Preview Decision Anouncement: July 1, 2007 at 04:30 GMT. RBA Cash Rate Target: 7.25% No rate changes likely. Inflation continues to be a problem for the Reserve Bank. Nevertheless, officials have suggested that some softness might be developing in the economy. This suggests that rates have reached their cyclical peaks. Note in the chart below that the two RBA core price measures are testing the top end of the bank's allowable limit. The global economic slowdown and historic highs of AUD are likely to restrain the risk of future rate hikes. RESERVE BANK OF AUSTRALIA Policy Objective: The policy objective is a target for consumer price inflation, of 2-3 per cent per annum. Monetary policy aims to achieve this over the medium term and, subject to that, to encourage the strong and sustainable growth in the economy. Controlling inflation preserves the value of money. In the long run, this is the principal way in which monetary policy can help to form a sound basis for long-term growth in the economy. The chart above shows year/year and the CPI target of 2% to 3% for this price index.

The chart above shows the current three month bank bill rate, the current Cash Rate target and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago. The chart provides a view on where the markets feel Australian interest rates are headed.

The chart above shows the Australian overnight rate target, three month bank bills, and two- and ten-year bond yields over the past twelve months.

Trading in the CAD had been volatile as the Bank of Canada was making aggressive rate cuts to keep pace with the Fed and to get ahead of a possible economic slowdown. No more rate reductions are in the pipeline.

CANADA

GVI Bank of Canada Policy Meeting Preview Decision: July 15 at 13:00 GMT. BOC Overnight Target Rate: 3.00% Expected Decision: no rate change. The Bank of Canada surprised the markets on June 10 by holding rates steady. It also clearly signaled that policy now is on hold. It said: "the Bank now judges that the current stance of monetary policy is appropriately accommodative to bring aggregate demand and supply into balance and to achieve the 2 per cent inflation target. There continue to be important downside and upside risks to inflation in Canada, which the Bank will monitor closely. BANK OF CANADA Policy Objective: The Bank of Canada aims to keep inflation at the 2 per cent target, the midpoint of the 1 to 3 per cent inflation-control target range. This target is expressed in terms of total CPI inflation, but the Bank uses a measure of core inflation as an operational guide. Core inflation provides a better measure of the underlying trend of inflation and tends to be a better predictor of future changes in the total CPI. The chart above shows year/year CPI-X (core CPI) and the target of 2% for this price index.

The chart above shows the current three month Banker Acceptance rate, the current BOC overnight rate target and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago. The chart provides a view on where the markets feel Canadian interest rates are headed.

The chart above shows the Canadian overnight rate target, three month Bankers Acceptance, and two- and ten-year bond yields over the past twelve months.

John M. Bland is a co-founder and partner of Global-View.com. Prior to Global-View.com, he was a Vice-President and senior dealer in a forex inter-bank and futures trading arm of a subsidiary (ContiCurrency) of the Continental Grain Company in NYC. Previous to that, he was one of the early members of the Chemical Bank corporate advisory service in NYC, and also worked in international liability management for that bank. John holds an MBA from the Hass School at the University of California at Berkeley and a bachelor�s degree in International Economics from Berkeley.

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