Forex Daily Analysis - Tuesday, Aug 21st

Quiet before the storm
Markets are nervous - volatility is still very high. This could be quietness before the storm.

Overnight bullets:

• SZ Producer and Import Prices July, out at 0.1% vs 0.3% exp. YoY ou tat 2.8% vs 3.0% exp.
• UK Rightmove House Prices Aug, out at 0.6% vs a prior reading of 0.3%. YoY out at 12.8% vs a prior reading of 10.3%.
• UK Public Finances July, out at -13.1B vs -11.0B exp.
• UK Public Sector Net Borrowing July, ouit at -6.5B vs -6.0B exp.
• UK M4 Money Supply July, out at 1.0% vs 0.7% exp. YoY out at 13.0% vs 12.6% exp.
• UK BSA Mortgage Approvals July, out at 3594M vs a prior reading of 3972M.
• US Leading Indicators July, out at 0.4% in line with exp.
• JN Convenience Store Sales (YoY) July, out at -0.1% vs a prior reading of -4.2%.
• JN All Industry Activity Index June, out at 0.2% vs 0.3% exp.

O/N Data Heat map:

EU	US	JP	UK	SZ	AU	CA	NZ	NO	SE	FR
0	-	0	0	0	0	+	0	+	+	0

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Calendar

Today's Highlights:

09:00	GE	ZEW Survey - Econ. Sentiment (AUG)	-1.5
09:00	GE	ZEW Survey – Current Situation (AUG)	85.0
09:00	EC	ZEW Survey - Econ. Sentiment (AUG)	0
09:00	EC	Euro-Zone Trade Balance (JUN)	4.0B
09:00	EC	Construction Output MoM/YoY (JUN)	Prior 0.2%/1.8%
11:00	CA	CPI MoM/YoY (JUL)	0.1%/2.2%
11:00	CA	CPI Core MoM/YoY (JUL)	0.1%/2.3%
12:30	CA	Leading Indicators MoM (JUL)	0.3%
12:30	CA	Retail Sales MoM/YoY (JUN)	-0.5%/-0.3%
15:00	US	Dodd Speaks After Meeting with Bernanke
21:00	US	ABC Consumer Confidence	Prior -11

This and Next Week’s Highlights:

22 Aug	AU	Westpac Leading Index, DEWR Skilled Vacancies, New Motor Vehicles
22 Aug	JN	BoJ Monetary Policy Meeting, Supermarket Sales, Net Stocks Investment, Net Bonds Investment
22 Aug	SW	Unemployment Rate
22 Aug	EC	Euro-Zone Current Account, Industrial Orders
22 Aug	US	MBA Mortgage Applications, DOE U.S. Crude Oil Inventories
23 Aug	GE	GDP, Private Consumption, Government Spending, Equipment Investment, Construction Investment, Domestic Demand, Imports, Exports
23 Aug	SZ	Trade Balance, Employment Level, ZEW Survey (expectations)
23 Aug	NO	GDP
23 Aug	UK	Total Business Investment
23 Aug	US	Initial Jobless Claims, Continuing Claims, EIA Natural Gas Storage Change
23 Aug	NZ	Trade Balance, Imports, Exports
23 Aug	JN	Corp. Service Price

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What's going on?

• Carry trades continue to rebound with EURJPY breaking 155.00 and USDJPY taking out 115.00 resistance suggest a breather in the unwinding story as markets still remain relatively calm after Fed's cut of the discount rate Friday in early NY trading. Technically high yielder's still has way to go before the bullish bias comes back. USDJPY needs to close above 120.00.

• Japanese Finmin Omi has agreed with U.S Treasury Secretary Paulson in a phone conversation Tuesday that the the two sides would closely monitor market developments, but no comments on specific FX levels. Again Japanese officials doing what they can to keep USDJPY above 110.00 which was the lower end of their preferred range last year. This has likely not changed.

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FX

Market : Not much interest in USD/Majors yesterday, with the exception of decent bidding in USDJPY supported by cross buying in EURJPY.

Carry Trades continuing to find support.

EUR	USD	JPY	GBP	CHF	AUD	CAD	NZD	NOK	SEK	PLN
+	0	-	0	0	0	+	0	+	+	0

FX Trading Strategies

Pair	Supp.	Resis.	Comments
GBPCHF	2.3900	2.4040	We have a signal this morning to go short GBPCHF at 2.3993 bid. So we placed an order to sell at 2.3997 stop offer targeting 2.3830, possibly 2.3760. Stop at 2.3953 bid.

MAJOR HEADLINES – PREVIOUS SESSION

• CA Wholesale Sales June, out at 0.2% vs 0.3% exp.
• US University of Michigan Confidence Aug, out at 83.3 vs 88.0 exp.
• US Baker Hughes U.S. Rig Count Aug, out at 1795 vs 1798 exp.
• NZ Visitor Arrivals July, out at -1.8% vs a prior reading of 0.8%.
• US Fed cuts discount rate from 6.25% to 5.75%.
• SZ PPI MoM/YoY (Jul) out at 0.1%/2.8% vs, 0.3%/3.0% expected.
• UK M4 Money Supply MoM/YoY (Jul)out at 1.0%/13.0%/ vs. 0.7%/12.6% expected.
• Uk M4 Sterling Lending (Jul) out at 24.8B vs. 12.0B expected.
• UK Public Finances (Jul) out at -13.1B vs. -11.0B expected.
• UK Public Sector Net Borrowing (Jul) out at -6.5B vs. -6.0B expected.
• UK BSA Mortgage (Jul) approvals at 3594 vs. 3921 prior.

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THEMES TO WATCH – UPCOMING SESSION

After the surprising move by the Fed on Friday, the markets have been failry quiet today. With the lack of important data releases, the JPY weakening across the board as investors leaned into carry trades once again. The move by the Fed has been critizised by many analysts as being to late as well as a 'rookie mistake' by Bernanke, which forces Fed to change their stance towards securing market stability instead of keeping inflation in check. By lowering the discount rate and issuing a statement conceding threats to the economy, Federal Open Market Committee members effectively ripped up the economic-outlook statement from their Aug. 7 meeting. Some economists describe the about-
face, coming after months of assurances that the subprime-mortgage rout was contained, as Chairman Ben S. Bernanke's first serious error since taking office last year. Although the discount rate was lowered, this does not tell us that the credit market turmoil is over. Although equities have led the way in the last couple of days, the USD only fell marginally on Friday, despite the lower discount rates and the expectations that the Fed will cut rates on the next FOMC meeting, the 18th of September.

The cut in US discount rates has also affected the expectations with regards to rate hikes from the ECB and their next meeting on September 6th. Today, Credit Suisse said that they expect ECB to raise rates to 4.25 pct. and no hikes in September. JPMorgan does not see a rate increase on the meeting in Sep. 07. Commerzbank no longer sees any hikes in the remainder of 2007. However - keep in mind that Trichet on the meeting in August expressed that policy makers would show 'strong vigilance' with regards to inflation - the wording used the last eight times to signal rate increases - suggesting that we will go to 4.25 pct. We expect Trichet raise rates as to keep the credibility at its highest level. EURUSD remained in a tight range 1.3474-1.3508 today.

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