• The dollar traded lower versus the yen on Monday but higher against other major currencies on continued global recovery concerns. US consumer spending accelerated in July but income growth was less than expected, indicating the economic recovery is fragile. Optimism among Texas manufactures dropped to the lowest level since March 2009. The S&P 500 fell 15.67 to 1,048.92, reversing Friday’s gains. The yen rose even though the Bank of Japan took steps to reign in the soaring yen. Japanese policy makers are not famous for decisive actions and the latest BOJ emergency meeting did nothing to change that perception. The BOJ expanded its bank-loan program by a meager ¥10 trillion and Prime Minister Naoto Kan pledged to spend ¥920 billion to strengthening domestic demand. The EUR/USD fell despite strong eurozone economic sentiment in August. The GBP/USD declined. August Hometrack UK home prices fell for a second consecutive month. The USD/CHF approached its 7-month low. The Australian and Canadian dollars fell for the first day in four as risk aversion increased.
• The dollar index rose for the first time in four. After breaking its downtrend on August 11, the index had edged higher and consolidated gains. The dollar index has support in the 82 area and resistance in the 83.50 area. A possible test of the 83.50 resistance may occur later this week. If this is broken, the index may rally to the 85 handle. This would be bearish for risky assets like equities and commodities.

Financial and Economic News and Comments

US & Canada

• US personal income was up a marginally less-than-expected 0.2% m/m in July after 0.0% m/m in June, data from the Commerce Department showed. Personal spending increased 0.4% m/m, the most since March, following June’s 0.0% m/m. Personal income rose 3.0% y/y in July; personal spending rose 3.4% y/y. Disposable personal income increased 0.2% m/m in July after 0.0% m/m in June. The savings rate fell to 5.9% from June’s downwardly revised 6.2%. The personal consumption expenditure deflator gained 0.2% m/m in July, up 1.5% y/y. The core PCE deflator, which excludes food and energy, was up 0.1% m/m in July, up 1.4% y/y.

• The Dallas Fed current general business activity index increased to -13.5 in August from -21.0 in July, Indicating Texas manufacturing activity contracted for a third consecutive month but at a slower pace, according to the latest Texas manufacturing outlook survey released by the Federal Reserve Bank of Dallas. The new orders index improved to -9.3 from July’s -9.6. However, the future general business activity index fell to -4.3 in August from 5.0 in the previous month.

• Canada’s current account deficit widened to a larger-than-expected C$11.0 billion ($10.4 billion) in Q2 2010, a seventh straight quarterly shortfall, from a revised C$8.5 billion deficit in Q1, figures from Statistics Canada showed.
• Canadian industrial product prices increased a less-than-expected 0.1% m/m in July, up 1.0% y/y, according to a separate report from Statistics Canada. Raw materials prices rose a more-than-expected 1.8% m/m in July, up 6.0% y/y.

Europe

• The eurozone economic sentiment index increased marginally higher than expected to 101.8 in August from a downwardly revised 101.1 in July, indicating eurozone economic confidence rose for a third consecutive month to the highest level since March 2008, data from the European Commission showed. Consumer confidence improved to -11 in August from -14 in July and confidence in the services sector increased to 7 from 6, while industrial confidence was unchanged at -4. In a separate measure of business confidence released by the EC, the business climate indicator slipped to 0.61 in August, the first decline in 17 months, from a downwardly revised 0.63 in July.

Asia-Pacific

• Australia’s company gross operating profits jumped a higher-than-anticipated 18.9% q/q sa in Q2 2010, a third consecutive quarterly gain, after an upwardly revised 4.3% q/q advance in Q1, according to data from the Australian Bureau of Statistics. Company gross operating profits surged 27.5% y/y sa, the first year-on-year rise since Q1 2009, following a 1.6% y/y Q1 decrease. Inventories declined 0.5% q/q sa in Q2 but increased 0.6% y/y sa. Wages and salaries rose 2.2% q/q sa in Q2, up 4.9% y/y sa.

• Australian new home sales fell 7.0% m/m in July, a third straight monthly slide, after a 5.1% m/m decline in June, the Housing Industry Association reported, calling “the new government to adopt a three point action plan to reduce the impact of regulation on the cost of new housing supply.”

FX Strategy Update

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