Week in Review

The Japanese yen was the biggest winner last week as seen with yen crosses topping the top movers chart. While most of the moves were done on Friday following the 170pts fall in Dow, such declines did have the significance of indicating that yen is regathering strength for medium term rally. The pair has been steady due to dollar's strength but upside momentum was seen diminishing after making at high at 110.66. Outlook is mixed in the pair for the moment with possibility of a reversal. And if the last defense is taken down and USD/JPY does reverse, further massive buying could be seen in the yen which pushes other yen crosses further lower. This will probably be the main focus in September.

Dollar enjoyed a strong broad based rally in August, in particular against Aussie and Sterling. Though, the greenback consolidated against most currencies last week together with choppy consolidation in oil and gold. Dollar index was basically bounded in tight range of 76.55 and 77.61 last week. In particular, oil was lifted by the worry of Hurricane Gustav, however, such impact could temporary. Some more consolidate may be seen in the greenback in near term, with risk of pulling back further against euro and Aussie, but more medium term strength is still in favor after the hurricane passes.

Euro did have the biggest monthly fall since 1999 in Aug. Though, the common currency was the relatively steady currency against dollar and in general last week. While data from Eurozone were generally weak, the common currency was supported by comments from ECB Weber that the discussion of a rate cut is premature. Such comment could be echoed by ECB Trichet this week and may give the Euro a boost but after all, the case of a medium term reversal in EUR/USD will likely continue to develop, in particular if Euro continues to be dragged down in EUR/JPY cross.

Sterling remained the weakest one among the majors along with the Aussie. GBP/USD has already taken out important support at 1.83 level which added more credence to the case that multi year long term up trend that started in 2001 has reversed. GBP/JPY also showed further sign that medium term down trend from 251.09 is ready to resume. More importantly, the pound was starting to display resumed weakness in EUR/GBP and GBP/CHF crosses, with EUR/GBP set to resume medium term up trend while GBP/CHF could also be resuming medium term down trend. Such weakness will likely continue and even accelerate in September.
Looking ahead, the week will start slightly with market holiday in US on Monday. However, volatility will continue to increase with a number of key events scheduled. Four central banks will meet this week including RBA, BoC, ECB and BoE. In addition, ISM manufacturing, Services as well as Non-Farm payroll from US will be released. Main focus will be on extension of strength in yen, weakness in Sterling, with uncertainty on whether dollar will resume rally.

FOMC minutes didn't revealed much new information. Members generally agree that the economy will remain weak and are generally concerned the possibility that core inflation will moderate as growth slows. The next move from Fed is still likely a hike but the opinion on the timing is rather divided.

Housing data were generally better than expected. Existing home sales rebounded strongly by 3.1% to 5.0m annualized rate in Jul, above expectation of 4.9M. New home sales climbed 2.4% from downwardly revised 0.503m to 0.515m annualized rate in Jul. S&P/CS Composite-20 HPI showed -15.9% fall in Jun, above expectation of -16.2%.

Headline durables jumped 1.3% in Jul versus consensus of 0%. This is the third consecutive months of expansion. Ex-transport orders rose 0.7% versus consensus of -0.5% fall. Ex-defense orders also rose 2.8% versus expectation of 0.2%. The data argued that business spending and confidence are continuing to recover in the US. Conference board consumer confidence improved more than expected to 56.9 in Aug. Jobless claims dropped slightly but remains elevated at 425k.

Preliminary Q2 GDP annualized growth rate was revised higher from 1.9% to 3.3% versus expectation of 2.7%. Record exports and the smallest trade deficit in eight years were the biggest driver in the upward revision. Personal consumption was revised up to 1.7% versus expectation of 1.6%.

Person income dropped more than expected by -0.7% in Jul, spending rose 0.2%. Headline PCE jumped to 4.5% yoy, highest in 17 years while core PCE rose 2.4%. Chicago PMI improved to 57.9 in Aug, much stronger than expectation of 50.0. Finalized reading of Aug U of Michigan consumer sentiment came in better than expected at 63.0.

Data from Eurozone were mixed. Germany IFO Business climate index dropped sharply from 97.5 to 94.8 in Aug, hitting a three year low. Expectation index also dropped sharply from 90 to 87.0. GFK consumer confidence dropped more than expected to 1.5. Eurozone HICP flash moderated more than expected to 3.8% yoy in Aug. However, M3 money supply slowed less than expected to 9.3% yoy in Jul. Unemployment rate was unchanged at 7.3% in Jul.

UK data were generally disappointing. Nationwide house prices fell for the ninth month by -1.9% mom in Aug, dragging yoy rate to -10.5%. CBI distributive trades dropped to -46 in Aug. Though, GFK consumer confidence unexpectedly improved from -39 to -36 in Aug.

Swiss KOF dropped more than expected to 0.68.

Japanese unemployment rate dropped from 4.1% to 4.0% in Jul. Retail sales jumped more than expected by 1.9%. Housing starts rise further to 19% yoy. Industrial production unexpected posted 0.9% mom gain in Jul, with yoy rate at 2.0%. Manufacturing PMI dropped less than expected to 46.9. More importantly, national CPI climbed to decades high of 2.3% yoy in Jul.

Canadian June GDP rose 0.1% mom. More importantly, Q2 GDP was weaker than expected by rising 0.3% only, below expectation of 0.7%. PPI rose 0.4% mom, 6.8% yoy in Jul.

The Week Ahead

The week could start slowly with market holiday in US on Monday. But volatility will continue to increase with a number of key events scheduled. In particular, focus will be on whether USD/JPY will signal a short term reversal and whether further broad based strength in the Japanese yen.

Four central banks will meet this week and RBA will take the lead in announcing rate decision on Tuesday. Markets generally expect a 25bps rate cut to 7.00% and focus will be on whether the bank will signal further rate cuts in the near future. Speculation is that RBA will cut by as much as a whole 1% by early 2009 and the Aussie will likely be further sold off if the RBA statement affirms such speculation.

BoC will announce rate decision on Wednesday and markets widely expect the bank to be on hold at 3.00%. USD/CAD's correction should have completed at 1.0410 last week and is set to extend the medium term rise from 0.9056. A dovish statement from the bank will probably be the trigger in fueling strong rally in USD/CAD this week.

ECB is widely expected to be on hold at 4.25% on Thursday. Near term outlook in EUR/USD is rather mixed with sign of a short term bottom, but without confirmation. Weber's the comment that discussion of rate cut is premature did provide some support to the common currency. Such comments will likely be echoed by Trichet in the press conference after the ECB meeting and will probably provide some lift to the common currency. However, just like last month, focus could quickly shift back to the slowdown in Eurozone and downside risks to growth and such rebound could proof to be short lived.

BoE is widely expected to be on hold at 5.00% and the meeting will likely be a non-event.

From US, ISM manufacturing index will start the calendar on Tuesday, Beige Book on Wednesday, ISM manufacturing index on Thursday and Non-Farm payroll on Friday. Other important data to watch include Eurozone August manufacturing and services PMI, Q2 GDP, Jul retail sales; UK Aug manufacturing and services PMI, nationwide consumer confidence; Swiss Aug CPI, Q2 GDP; Australia Q2 GDP; Canadian Aug job report and Ivey PMI.