• The dollar, while falling against the yen and Swiss franc, rose versus other major counterparts on Tuesday on renewed concern about the European financial system. European bank stress tests understated banks’ holdings of sovereign debts, Wall Street Journal reported. Yields in Germany and the US fell while those in Portugal and Ireland rose. The S&P 500 fell 12.67 to 1,091.84, its first decline in five days. The USD/JPY dropped to the lowest level in 15 years. The Bank of Japan maintained the benchmark interest rate at 0.10% and kept its bank-loan facility at ¥30 trillion ($358 billion). The GBP/USD fell for a second day. The Australian dollar declined. The Reserve Bank of Australia kept its key rate at 4.50%, as expected, but said the global economic outlook remains “somewhat uncertain.” Prime Minister Julia Gillard sealed a deal with two independent lawmakers, allowing her Labor Party to form a new government. The Canadian dollar fell ahead of Wednesday’s Bank of Canada rate decision meeting where the central bank will likely raise its benchmark rate to 1.00% from 0.75%.
• Following Monday’s unsuccessful attempt to break the 1.29-area resistance, the EUR/USD fell and broke the 1.27-area support, pressured by renewed bank worries and an unexpected decline in German manufacturing orders. The pair is likely to test strong support in the 1.26-1.25 area. If this is broken, the EUR/USD outlook will turn more bearish. Resistance is in the 1.2750 area.

Financial and Economic News and Comments

US & Canada

• The Globicus/qEcon Research leading economic indexes’ growth rates stabilized at low levels, suggesting the US economy will continue to grow but at a decelerating pace in late 2010. The overall leading economic index’ growth rate, a measure of future economic growth, was at 1.3 in August, up slightly from 1.0 in July but down sharply from November’s 11.4 high. The short leading index’ growth rate was at -0.8 in August, its third consecutive negative reading, marginally improving from -0.9 in the previous month. The long leading index’ growth rate was at 4.1 in August, up from 3.6 in July but considerably below September’s 12.3 peak. Meanwhile, the coincident index’ growth rate, a measure of current economic growth, increased marginally to 2.6 in July from 2.5 in June. The second GDP estimate released by the Commerce Department showed US GDP grew at a downwardly revised 1.6% annualized rate in Q2 2010, a fourth straight quarterly expansion but slowing from a 3.7% annualized pace in Q1. The falling dollar in the last few months had eased recessionary risks; however, a renewed dollar surge will increase debt deflation and the risk of a new recession. The probability of a double-dip US recession in the next 3-9 months has declined to less than 25%.

Europe

• Germany’s seasonally adjusted manufacturing orders unexpectedly decreased 2.2% m/m in July after an upwardly revised 3.6% m/m increase in June and a downwardly revised 0.2% m/m decline in May, according to data from the Federal Ministry of Economics and Technology. July manufacturing orders grew 14.0% y/y nsa, a ninth straight year-on-year gain but the smallest since December 2009, following an upwardly revised 28.5% y/y June advance.

• UK retail sales rose 1.0% y/y on a like-for-like basis and 2.8% y/y on a total basis in August after increasing 0.5% y/y on a like-for-like basis and 2.6% y/y on a total basis in July, the British Retail Consortium reported.
• Switzerland’s seasonally adjusted unemployment rate remained at 3.8% in August and the non-seasonally adjusted unemployment rate held at 3.6%, the State Secretariat for Economic Affairs said.

Asia-Pacific

• The Japanese leading economic indicators index, a measure of future economic activity, fell to 98.2 in July, the third fall in four months, from 99.0 in June, preliminary July LEI data from the Cabinet Office showed. The coincident index, measuring current economic activity, rose to 101.8, the 15th rise in 16 months, from June’s 101.3.

• The Australian Industry Group/Housing Industry Association performance of construction index edged down to 43.2 in August from 43.3 in July, indicating Australia’s construction sector contracted for a third consecutive month and at the fastest declining rate since July 2009, according to an AiG/HIA report. The activity index edged up to 40.1 from July’s 40.0, signaling construction activity shrank for a fourth straight month. The new orders index increased to 43.5 in August from 43.0 in July, suggesting new orders contracted for a third successive month but at a slightly slower pace. The employment index advanced to 44.9 from July’s 43.3, indicating construction employment shrank for a third consecutive month but at a slightly slower rate.

FX Strategy Update

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