Yen Falls as Risk Aversion Eases

The dollar traded mixed on Friday, higher against the yen but lower versus the commodity currencies as risk appetite rose. Federal Reserve Chairman Ben Bernanke said the Fed is prepared to provide additional unconventional stimulus measures if needed. US GDP growth slowed less than expected in Q2 2010. The S&P 500 rose 17.37 to 1,064.59. The EUR/USD was up modestly. Germany's consumer-price inflation eased in August. The GBP/USD edged lower. UK GDP grew marginally more than estimated in Q2 2010. The USD/CHF rose from a 7-month low. The Australian and Canadian dollars gained for a third consecutive day on higher commodity prices.

The USD/JPY rose for a second day in three and tentatively broke its 3-month downtrend on easing recession fears. Bernanke reinsured the financial market that there is no immediate easing from the Fed and “preconditions” are “in place” for economic growth in 2011. Japanese Prime Minister Naoto Kan said excessive movement in the currency market is bad for the economy, asserting that “we will take decisive action when necessary.” The USD/JPY is closely correlated with the stock market through carry trades and Japanese foreign equity investments. The USD/JPY's high during April-May corresponds with the S&P 500's high in April. The S&P 500 is now at important support and the USD/JPY is near a 15-year low. A falling wedge formation on the chart implies a short-term rally. We buy the USD/JPY with stop at 84.30.

Financial and Economic News and Comments

US & Canada

US GDP grew at a 1.6% annualized rate in Q2 2010 (vs. preliminarily reported 2.4%), a fourth successive quarterly expansion, after a 3.7% annualized pace in Q1, according to the second GDP estimate released by the Commerce Department, signaling US economic growth is seriously slowing. Still, the downwardly revised Q2 estimate was above market expectations. The Q2 GDP rose a downwardly revised 3.0% y/y. The largest downward revisions were for net exports and inventories. Personal consumption and business investment in equipment/software were revised upward. The largest positive contributors to Q2 GDP growth were personal consumption and business investment in equipment/software, while the weakest component was net exports. Consumer spending rose at a 2.0% annualized pace in Q2 (vs. preliminarily reported 1.6%) after a 1.9% annualized rate in Q1. Core personal consumption expenditure, which excludes volatile food and energy prices and is closely watched by the Federal Reserve, increased at an unrevised 1.1% annualized rate, following Q1's 1.2% annualized pace. The GDP price index advanced at a 1.9% annualized pace in Q2 (vs. preliminarily reported 1.8%) after a 1.0% annualized rate in Q1.

The Thomson Reuters/University of Michigan final consumer sentiment index increased to 68.9 (vs. preliminarily reported 69.6) in August from 67.8 in July, indicating US consumer confidence rebounded from last month's lowest level since November 2009, the latest Thomson Reuters/University of Michigan surveys of consumers showed, compared with August 2009's 65.7. The current economic conditions index advanced to an unrevised 78.3 in August from 76.5 in the previous month. The consumer expectations index improved to 62.9 (vs. preliminarily reported 64.1) from July's 62.3.

Europe

Germany's consumer prices were unchanged m/m in August, the first time without rise in four months, after a 0.3% m/m increase in July, according to preliminary August CPI data from the Federal Statistical Office. The consumer-price inflation rate eased to 1.0% y/y from July's 1.2% y/y. The harmonised index of consumer prices, calculated for European purposes, were also unchanged m/m in August after increasing 0.3% m/m in July. The HICP rate decelerated to 0.9% y/y from July's 1.2% y/y. The August numbers were marginally below expectations.

UK GDP rose 1.2% q/q in Q2 2010 (vs. initially reported 1.1% q/q), a third consecutive quarterly rise and the fastest since Q1 2001, after a 0.3% q/q increase in Q1, preliminary Q2 GDP data from the Office for National Statistics showed. The Q2 GDP expanded 1.7% y/y (vs. initially reported 1.6% y/y), following Q1's 0.2% y/y contraction.

The KOF Swiss economic barometer fell for a second month in August, declining to 2.18, from July's downwardly revised 2.22, the Konjunkturforschungsstelle Swiss Institute for Business Cycle Research reported, asserting that “the current upbeat pace of Swiss economic growth will continue throughout the next few months, but will not accelerate any further.”

Asia-Pacific

Japan's core consumer prices, which exclude fresh food, fell as forecast 1.1% y/y in July, a 17th straight yearon- year slide, after a 1.0% y/y decline in June, according to CPI data from the Statistics Bureau, signaling prolonged deflation remains a major threat to Japanese economic growth and raising hopes for further monetary easing by the Bank of Japan. The CPI excluding food and energy fell 1.5% y/y, matching June's year-on-year fall. Tokyo's core CPI, a leading indicator for nationwide price trends, declined 1.1% y/y in August after a 1.3% y/y decrease in July.

The Japanese seasonally adjusted unemployment rate unexpectedly fell to 5.2% in July, the first fall in six months, from 5.3% in June, data from the Statistics Bureau showed. The economy added 210,000 jobs from a month earlier, a second consecutive monthly gain. The job-to-applicant ratio, a leading indicator of employment trends, increased to 0.53 in July, the highest level since March 2009, meaning there were 53 positions for every 100 candidates, compared with June's 0.52.

Japanese household spending increased a less-than-expected 1.1% y/y in July, a second consecutive yearon- year gain, after a 0.5% y/y advance in June, according to a separate report from the Statistics Bureau.

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