• The dollar rose against most of its rivals on Friday. US July retail sales increased in line with forecast; July inflation was tame; and August consumer sentiment rebounded from an 8-month low. The S&P 500 declined 4.36 to 1,079.25, pressured by disappointing sales reports from US retailers in July. The yen fell for a second day, finding support at a 15-year low. The July 14-15 Bank of Japan minutes revealed some BOJ board members wanted the central bank to more closely monitor the stronger yen’s effect on the economy. The EUR/USD fell for a fifth consecutive day despite stronger-than-expected European GDP growth. The euro fell for the first week in seven, pressured by renewed worries about the sovereign debt problem and the solidity of the banking sector. The GBP/USD was up modestly today but down for the first week in five. The Australian dollar fell today and declined for the first week in four. Despite its gain for a second day, the Canadian dollar fell for a second week.
• The dollar index rose for a fifth straight day and for the first week in ten after finding support at the 80 handle. Importantly, the dollar index broke its downtrend this week; thus, indicating further gains. After this week’s advance, there may be some consolidation. We hope to take advantage of a possible dollar weakness next week and short some European currencies. The dollar index has support in the 80 area and resistance in the 83.50 area.

Financial and Economic News and Comments

US & Canada

• US retail sales grew as forecast 0.4% m/m to $362.7 billion in July, the first gain in three months led by autos and gasoline, after a revised 0.3% m/m decrease in June, data from the Commerce Department showed. Retail sales excluding autos increased 0.2% m/m to $299.7 billion, also the first advance in three months, following June’s 0.1% m/m decline. Retail sales rose 5.5% y/y in July, a ninth straight year-on-year rise; exauto retail sales rose 4.9% y/y.

• US consumer prices increased a marginally more-than-expected 0.3% m/m in July, the first advance in four months, after a 0.1% m/m decline in June, according to CPI data from the Labor Department. The consumerprice inflation rate quickened as expected to 1.2% y/y from June’s 1.1% y/y. The July month-on-month CPI increase was led by energy costs, which rose 2.6% m/m. Food prices slipped 0.1% m/m. The core CPI, which excludes food and energy, was up as forecast 0.1% m/m in July after a 0.2% m/m increase in June. The core CPI rate held at 0.9% y/y, as expected. Meanwhile, real average hourly earnings declined 0.2% m/m in July but grew 0.7% y/y, a separate report from the Labor Department showed.
• The Thomson Reuters/University of Michigan preliminary consumer sentiment index increased to a higherthan- expected 69.6 in August from 67.8 in July, indicating US consumer confidence rebounded from last month’s low, the latest Thomson Reuters/University of Michigan surveys of consumers showed, compared with August 2009’s 65.7. The current economic conditions index advanced to 78.3 in August from 76.5 in the previous month. The consumer expectations index increased to 64.1 from 62.3.

• US business inventories grew 0.3% m/m in June after an upwardly revised 0.2% m/m increase in May, according to data from the Commerce Department. June business inventories were up 0.2% y/y.

Europe

• Eurozone seasonally adjusted GDP grew a more-than-expected 1.0% q/q in Q2 2010, a fourth consecutive quarterly expansion and the most since Q2 2006, after a 0.2% q/q increase in Q1, flash Q2 GDP data from Eurostat showed. The Q2 GDP rose 1.7% y/y, a second consecutive year-on-year rise, following Q1’s 0.6% y/y advance.

• In non-seasonally adjusted terms, the eurozone trade balance showed a €2.4 billion ($3.1 billion) surplus in June, better than expected, after a revised €3.3 billion deficit in May, compared with a €5.2 billion surplus in June 2009, according to figures from Eurostat. In seasonally adjusted terms, the trade balance registered a €1.6 billion deficit in June, a second consecutive monthly shortfall but narrowing from a revised €2.7 billion deficit in the previous month. Seasonally adjusted exports gained 5.2% m/m to €130.8 billion in June after an upwardly revised 1.8% m/m advance in May. Seasonally imports grew 4.3% m/m to €132.4 billion, following May’s downwardly revised 4.0% m/m increase.

• Germany’s seasonally adjusted GDP rose a more-than-expected 2.2% q/q in Q2 2010, a fifth straight quarterly rise and the fastest since the 1990 German reunification, after an upwardly revised 0.5% q/q advance in Q1, preliminary Q2 GDP data from the Federal Statistical Office showed. The Q2 GDP expanded 4.1% y/y nsa, a second consecutive year-on-year gain and the most since Q4 2006, following Q1’s upwardly revised 2.1% y/y growth.
• Switzerland’s producer and import prices fell for a second month in July, falling a more-than-expected 0.5% m/m, after a 0.4% m/m June decline, according to data from the Swiss Federal Statistical Office. Producer and import prices increased 0.5% y/y, following June’s 0.9% y/y advance.

Asia-Pacific

• Hong Kong’s GDP grew 6.5% y/y in Q2 2010, less than a revised 8.0% y/y expansion in Q1, figures from the Census and Statistics Department showed. The Q2 GDP rose a seasonally adjusted 1.4% q/q, slowing from a revised 2.1% q/q Q1 advance. The economy will expand between 5.0% and 6.0% for 2010, the government said, revising up a previous GDP estimate, while keeping its inflation forecast unchanged at 2.3%.

FX Strategy Update

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