• Down versus most of its counterparts on Monday, the dollar was pressured after Yu Yongding, a former adviser to the People’s Bank of China said China is diversifying its foreign-exchange reserves and buying more euro and yen. Economic data showed further signs of weakening global economic growth. The Japanese economy barely grew in Q2 2010; August US homebuilder confidence slumped to the lowest level since March 2009; and New York manufacturing new orders contracted this month after expanding for 13 straight months. The Federal Reserve said US banks have eased their lending standards but loan demand was little changed in Q2. The S&P 500 edged up 0.13 to 1,079.38. The EUR/USD rose for the first day in six. We are selling the pair with stop at 1.3060. The GBP/USD climbed for a second day ahead of UK inflation data. The Australian dollar advanced for the first day in six ahead of the Reserve Bank of Australia’s release of August meeting minutes. The Canadian dollar was down modestly.
• The USD/JPY fell following a government report on weaker-than-expected Q2 2010 Japanese economic growth. Real GDP rose 0.4% and nominal GDP fell 3.7% at annualized rates. Technically, the USD/JPY is in a clearly defined downtrend; however, having traded sideways in a narrow range between 84.80 and 86.50 in the last two weeks. The USD/JPY’s decline has been limited by speculation that the Japanese authorities may intervene to slow down the descent. Some reports indicated Prime Minister Naoto Kan and Bank of Japan Governor Masaaki Shirakawa are set to meet later this week to discuss the yen’s strength and possible responses. We believe the USD/JPY will make a bottom soon and buy the pair with stop at 84.40. Important support is at last week’s 15-year low of 84.72 and resistance is in the 86.50 area.

Financial and Economic News and Comments

US & Canada

• The Globicus/qEcon Research leading economic indexes’ growth rates are dropping, suggesting US economic growth is seriously slowing in late 2010. The overall leading economic index’ growth rate, a measure of future economic growth, was at 1.0 in July, down sharply from a 12.0 high in November. The short leading index’ growth rate fell to -0.9 in July, its second consecutive negative reading. The long leading index’ growth rate stood at 3.4 in July, considerably below September’s 12.8 peak. Overall, the leading indexes indicate the US economic expansion is faltering with the risk for a double-dip recession increasing considerably. Meanwhile, the coincident index’ growth rate, a measure of current economic growth, improved marginally to 2.9 in June from 2.8 in May. The advance GDP estimate released by the Commerce Department showed US GDP increased at a 2.4% annualized rate in Q2 2010, a fourth consecutive quarterly expansion but slowing from a 3.7% annualized pace in Q1. The falling dollar in the last few months had eased the recession risk; however, a renewed dollar surge will increase debt deflation and the risk of a new recession. The probability of a US double-dip recession in the next 6-9 months is about 30-40%.

• The Empire State manufacturing index increased less than expected to 7.10 in August from 5.08 in July, indicating New York manufacturing activity expanded for a 13th straight month and at a slightly faster pace, according to the latest Empire State manufacturing survey released by the Federal Reserve Bank of New York. The employment index rose to 14.29 from July’s 7.94, showing employment expanded for an eighth consecutive month and at the fastest pace in three months. However, the new orders index dropped to -2.71 in August from 10.13 in July, suggesting new orders contracted for the first time since June 2009.

• Net foreign purchases of long-term US securities rose to $44.4 billion in June from a downwardly revised $35.3 billion in May, while monthly net TIC flows were -$6.7 billion, the first decline since January, compared with May’s downwardly revised $17.1 billion, figures from the Treasury Department showed.
• The National Association of Home Builders/Wells Fargo housing market index unexpectedly declined to 13 in August from 14 in July, suggesting US homebuilder confidence fell for a third consecutive month to the lowest level since March 2009, according to an NAHB report. A reading below 50 means most respondents view conditions as poor. The measure of current single-family home sales slipped to 14 in August from 15 in the previous month. The gauge of buyer traffic was unchanged at 10. The measure of sales expectations for the next six months fell to 18, the lowest level since March 2009, from 21.

Europe

• The eurozone consumer-price inflation rate accelerated to 1.7% y/y in July, the fastest since November 2008, from 1.4% y/y in June, CPI data from Eurostat showed, matching a flash estimate published on July 30, compared with -0.6% y/y in July 2009. The core CPI rate quickened to 1.0% y/y from June’s 0.9% y/y. However, monthly CPI was down 0.3% m/m in July, the first month-on-month decline since January, after 0.0% m/m in the previous month.

• UK house prices fell 1.7% m/m in August, a second consecutive monthly fall, to an average £232,241 ($363,483), after a 0.6% m/m decrease in July, Rightmove Plc reported. House prices rose 4.3% y/y, an 11th successive year-on-year gain, following July’s 3.7% y/y increase. London’s house prices fell 4.1% m/m to an average £405,058 in August, the largest decline in two years, but rose 4.6% y/y.

Asia-Pacific

• Japan’s GDP grew less than expected at a 0.4% q/q annualized rate in Q2 2010 after rising at a downwardly revised 4.4% q/q annualized pace in Q1, according to preliminary Q2 GDP data from the Cabinet Office. The Q2 GDP was up a modest 0.1% q/q, a third consecutive quarterly expansion, slowing from a downwardly revised 1.1% q/q Q1 increase. The Q2 GDP rose 2.0% y/y, easing from an upwardly revised 4.7% y/y rise. The GDP deflator declined 1.8% y/y in Q2 after falling 2.8% y/y in Q1. The Japanese economy was valued at about $1.28 trillion in Q2, slightly below China’s $1.33 trillion, reinforcing the idea that China passed Japan to become the world’s second-largest economy behind the US.

• The Japanese tertiary industry activity index slipped 0.1% m/m sa to 97.1 in June after a revised 0.8% m/m decline in May, indicating Japan’s demand for services fell for the fourth time in five months, data from the Ministry of Economy, Trade and Industry showed. The index was up 0.8% y/y sa, a sixth straight year-on-year increase, following May’s upwardly revised 1.1% y/y advance.
• Australia’s seasonally adjusted new motor vehicle sales fell 2.6% m/m to 85,019 units in July, a third consecutive monthly fall, after a revised 1.4% m/m decline in June, the Australian Bureau of Statistics reported. New motor vehicle sales rose 11.6% y/y sa, a tenth straight year-on-year gain, following June’s downwardly revised 7.8% y/y rise.

FX Strategy Update

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