Daily Analysis for Wednesday, Aug 2nd

Massive Unwinding of Carry Trades

Soft US PCE figures yesterday did not have any immediate impact on the USD. We remain bearish on the USD ahead of the ADP report and ISM figures later. Carry trades drop on reduction of risky assets.

MAJOR HEADLINES -- PREVIOUS SESSION
* SZ UBS Consumption Indicator (JUN) out at 2.309, while 2.090 expected.
* NO Credit Indicator Growth (JUN) out at 14.7%, while 14.6% expected, 14.8% prior.
* EC Euro-zone Consumer Confidence (JUL) out at -2, while -2 expected, -2 prior.
* EC Euro-Zone Unemployment Rate (JUN) out at 6.9%, while 7.0% expected, 7.0% prior (6.9% prior).
* UK GfK Consumer Confidence Survey (JUL) out at -6, while -4 expected, -3 prior.
* US Personal Income (JUN) out at 0.4%, while 0.5% expected, 0.4% prior.
* US Personal Spending (JUN) out at 0.1%, while 0.1% expected, 0.5% prior.
* US PCE Deflator YoY (JUN) out at 2.3%, while 2.3% expected, 2.3% prior.
* US PCE Core MoM/YoY (JUN) out at 0.1%/1.9%, while 0.2%/1.9% expected, 0.1%/1.9% prior.
* US Employment Cost Index (2Q) out at 0.9%, while 0.9% expected, 0.8% prior.
* US Chigago Purchasing Manager (JUL) out at 53.4, while 58.4 expected, 60.2 prior.
* US Consumer Confidence (JUL) out at 112.6, while 105.0 expected, 103.9 prior.
* US Construction Spending MoM (JUN) out at -0.3%, while 0.2% expected, 0.9% prior.
* CA GDP MoM (MAY) out at 0.3%, while 0.4% expected, 0.0% prior.
* UK Nationwide Consumer Confidence (JUL) out at 96, while 93 expected, 95 prior.
* AU AiG Performance of Mfg Index (JUL) out at 57.4, while 53.1 prior.
* AU Retail Sales (JUN) out at 1.4%, while 1.0% expected, -0.1% prior.
* AU Retail Sales Ex. Inflation QoQ (2Q) out at -0.2%, while 0.3% expected, 2.0% prior.
* AU Trade Balance (JUN) out at -1751M, while -1150M expected, -807M prior.
* AU Exports/Imports (JUN) out at 17,962M/19,713M, while 18,727M/19,534M prior.
* JN Vehicle Sales YoY (JUL) out at -9.7%, while -11.2% prior.

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THEMES TO WATCH -- UPCOMING SESSION
As we anticipated, the US PCE figures came out a tad softer than expectations, but we did not see the significant sell-off in the USD, which we had anticipated. In fixed income we saw higher treasuries as a response to the weak inflation figures sending yields lower, which usually also is reflected in a weaker USD. EURUSD was fairly range-bound yesterday, ranging from 1.3680-1.3727. The main story is still concerns in the markets theat the recent credit market turmoil and subprime concerns will spill over into the economy as several houses have reported that they also are seeing defaults in not so risky assets, adding incentives for the investors to reduce their risky positions. This is why we have seen the correction in carry trades and in riskier assets as credit spreads have widened.
This morning, USDJPY broke below 118 and we see further downside if 117.60 is broken - targeting 115.60 in the medium term. The same picture is reflected is more or less all JPY crosses, who are looking fragile.
For EURUSD, we expect some more sell-off in USD to send the pair higher - a test of 1.3770 within this week is not unlikely.
Focus point of today will be the US July ADP report (expected at 100K), which gives a proxy for the US non-farm figures released on Friday along with the US July job report, as well as the ISM indices for July. The Manufacturing index is expected to fall a tad to 55.3 from 56.0 and the Prices Paid is expected to drop to 67 from 68 prior, which will add support to our bearish USD-view.

Overnight News Bullets
* SW PMI Survey (JUL) out at 60.5, while 60.1 expected, 60.3 prior.
* US MBA Mortgage Applications (JUL) out at -0.3%, while -3.6% prior.
* US Challenger Job Cuts YoY (JUL) out at 15.4%, while -17.0% prior.
* US ADP Employment Change (JUL) out at 48K, while 100K expected, 150K prior.
* US Pending Home Sales MoM (JUN) out at 5.0%, while -0.5% expected, -3.5% prior.
* US ISM Manufacturing (JUL) out at 53.8, while 55.0 expected, 56.0 prior.
* US ISM Prices Paid (JUL) out at 65.0, while 67.0 expected, 68.0 prior.
* US DOE U.S. Crude Oil Inventories (JUL) out at -6497K, while -1000K expected, -1103K prior.
* US Total Vehicle Sales (JUL) out at 15.5M, while 16.0M expected, 15.6M prior.
* US Domestic Vehicle Sales (JUL) out at 11.7M, while 12.2M expected, 11.8M prior.
* JN Net Stock/Bonds investment (JUL) out at --JPY291.1B/-JPY617.3B, while JPY236.5B/JPY495.8B prior (revised JPY239.3B/JPY494.8B)
* JN Monetary Base YoY (JUL) out at -2.3%, while -3.0% expected, -4.1% prior.

Markets
* FX: JPY strong, USD strengthening despite continuing weak data. EUR weaker.

O/N Data Heat map:

EU	US	JP	UK	SZ	AU	CA	NZ	NO	SE	FR
-	-								+

Calendar

Today's Highlights:

Time (GMT)	Region	Release	Consensus
07:00	UK	HBOS Plc House Prices MOM (JUL)	0.3%
07:00	UK	HBOS Plc House Prices 3Mths/Year	11.1%
07:00	NO	Norway PMI (JUL)	60.9
07:30	SZ	SVME-Purchasing Managers Index (JUL)	62.0
07:30	SW	GDP QoQ/YoY (2Q)	0.8% / 3.2%
08:00	NO	Unemployment Rate (JUL)	2.0%
09:00	EC	Euro-Zone PPI MoM/YoY (JUN)	0.3% / 2.3%
11:00	UK	BoE Announces Interest Rates (AUG)	5.75%
11:45	EC	ECB Announces Interest Rates (AUG)	4.00%
12:30	US	Initial Jobless Claims (JUL)	310K
12:30	US	Continuing Claims (JUL)	2548K
14:00	US	Factory Orders (JUN)	1.0%
14:30	US	EIA Natural Gas Storage Change (JUL)	75
23:30	AU	AiG Performance of Service Index (JUL)	Prior 54.9

This and Next Week’s Highlights:

Date	Region	Release
3 Aug	AU	TD Securities Inflation.
3 Aug	SZ	CPI.
3 Aug	EC	Euro-Zone Retail Sales.
3 Aug	UK	Official Reserves.
3 Aug	US	Change in Nonfarm Payrolls, Average Hourly Earnings, Average Weekly Hours, ISM Non-manufacturing, Baker Hughes U.S. Rig Count, Unemployment Rate.
3 Aug	CA	Ivey Purchasing Managers Index
5 Aug	NZ	Labor Cost Alle Wages Private

What's going on?

* Total Vehicle Sales in the US disappointing. 12-month average now the lowest since 1999 and headed lower. Another sign that private consumption is decelerating.
* High-yielding currencies were picked up from new lows vs. JPY and CHF yesterday. They might be reasonably supported today.

FX

EURUSD still above the 200-Day Moving Average

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EUR	USD	JPY	GBP	CHF	AUD	CAD	NZD	NOK	SEK	PLN
	-		+	+	-	+	-		+

FX Trading Strategies

Pair	Supp.	Resis.	Comments
EURUSD	1.3627	1.3717	Still weak inflationary data make us believe that we will see the USD lower. However - better than expected housing data keeps the USD bid.We buy at 1.3672 bid, stop offer at 1.3650, target at 1.3770.
EURSEK	9.13	9.27	Sell break of 9.2250 offer, stop bid at 9.2280, targeting 9.1500

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