USD Modestly Lower Ahead Of Employment Data

The dollar traded mostly lower on Thursday ahead of important US employment data on Friday. The dollar index, down for six out of the last seven days, is approaching the important 82 support. If this support holds, a short-term USD rally may occur. Treasuries weakened. US pending home sales unexpectedly rose in July and initial jobless claims declined, easing concern about slowing US economic growth. The S&P 500 gained 9.81 to 1,090.10. The USD/JPY was down modestly. Japanese officials told reporters that they believe the US would oppose intervention by Japan to support the USD/JPY. Prime Minister Naoto Kan is facing a challenge to his leadership by Ichiro Ozawa who has called for a yen depreciation. The GBP/USD was pressured by declining UK home prices. The Australian dollar was little changed, while the Canadian dollar consolidated yesterday's strong gains.

The EUR/USD was up slightly, supported by a successful Spanish government-debt auction. The European Central Bank maintained its benchmark interest rate at 1.00% and extended emergency lending measures for banks into 2011, as expected. ECB President Jean-Claude Trichet said the recovery 'should proceed at a moderate pace,' adding that 'overall, the current monetary stance remains accommodative' and risk to the inflation outlook is 'on the upside.' The EUR/USD broke its short-term downtrend; however, lacking a clear direction. We expect further consolidation between the 1.26 and 1.29 areas. A break of either of these technical levels will imply continuation in the same direction.

Financial and Economic News and Comments

US & Canada

• The NAR US pending home sales index, a leading indicator for the housing sector, unexpectedly increased 5.2% m/m to 79.4 in July after a downwardly revised 2.8% m/m decline to 75.5 in June, indicating US pending home sales gained for the first time in three months in the post-tax credit market, according to a report from the National Association of Realtors. July pending home sales fell 19.1% y/y, following a revised 18.8% y/y June decrease.

• US initial jobless claims in the week ending August 28 fell 6,000 to 472,000, a second consecutive weekly fall, from the previous week's upwardly revised 478,000, figures from the Labor Department showed, compared with 568,000 a year earlier. The 4-week moving average declined 2,500 to 485,500. Continuing claims in the week ending August 21 fell 23,000 to 4,456,000 from the preceding week's upwardly revised 4,479,000, compared with 6,111,000 a year earlier. The 4-week moving average of those continuing claims dropped 28,500 to 4,485,250. The insured unemployment rate for the week ending August 21 was unchanged at 3.5%.

• US factory orders edged up a modest 0.1% m/m to $409.5 billion in July, the first increase in three months, after an upwardly revised 0.6% m/m decline in June, according to data from the Commerce Department. Excluding transportation, factory orders fell 1.5% m/m to $356.9 billion, a fourth consecutive monthly fall, following June's upwardly revised 0.6% m/m decrease. Factory orders rose 8.6% y/y nsa in July; extransportation factory orders rose 11.0% y/y nsa.
• US nonfarm productivity fell at a 1.8% q/q annualized rate (vs. preliminarily reported -0.9% q/q) in Q2 2010, the first decline since Q4 2008, after rising at a 3.9% q/q annualized pace in Q1, final Q2 data from the Labor Department showed. Q2 nonfarm productivity rose a downwardly revised 3.7% y/y. Unit labor costs increased at a 1.1% q/q annualized rate in Q2 (vs. preliminarily reported +0.2% q/q), the first gain since Q2 2009, after declining at a revised 4.6% q/q annualized pace in Q1. Q2 unit labor costs decreased 2.8% y/y.

Europe

• Eurozone seasonally adjusted GDP increased an unrevised 1.0% q/q in Q2 2010, a fourth consecutive quarterly expansion and the most since Q2 2006, after an upwardly revised 0.3% q/q advance in Q1, according to preliminary Q2 GDP data from Eurostat. The Q2 GDP grew an upwardly revised 1.9% y/y following Q1's upwardly revised 0.8% y/y growth, registering a second consecutive year-on-year gain.

• Eurozone producer prices grew 0.2% m/m in July, a 10th straight month-on-month gain, after a 0.3% m/m increase in June, PPI data from Eurostat showed. Producer prices rose 4.0% y/y, a fifth consecutive year-onyear rise, following June's 3.0% y/y advance.

• The CIPS/Markit UK construction PMI declined to a lower-than-expected 52.1 in August from 54.1 in July, indicating growth in the UK construction sector continued for a sixth successive month but slowed for a third consecutive month from May's recent high, according to data from Markit Economics and the Chartered Institute of Purchasing and Supply.
• UK house prices fell 0.9% m/m in August, the deepest fall in six months, to £166,507 ($256,304), after a 0.5% m/m decrease in July, Nationwide reported. House prices rose 3.9% y/y, the slowest pace since November 2009, following July's 6.6% y/y gain.
• Switzerland's GDP grew 0.9% q/q in Q2 2010, a fourth consecutive quarterly expansion, after an upwardly revised 1.0% q/q advance in Q1, data from the State Secretariat for Economic Affairs showed. The Q2 GDP rose 3.4% y/y, following Q1's upwardly revised 2.3% y/y rise.

Asia-Pacific

• Japan's monetary base increased 5.4% y/y in August, following a 6.1% y/y July gain that was the largest since August 2009's 6.1% y/y, according to data released by the Bank of Japan.
• Australia's trade surplus narrowed more than anticipated to A$1.89 billion ($1.72 billion) in July from a downwardly revised A$3.44 billion in June, figures from the Australian Bureau of Statistics showed. Exports declined 4.0% m/m to A$25.4 billion in July, while imports increased 2.0% m/m to A$23.5 billion

FX Strategy Update