Dollar Overbought

The dollar consolidated gains against other major currencies Monday after reaching multi-month and multiyear highs last week. The greenback is currently overbought and data from the Chicago Mercantile Exchange showed that in the week to August 12, speculative investors had shifted their positions to stand long of the dollar against other leading currencies for the first time since February 2007. This could be read as bullish for the dollar, but we are more inclined to view that the greenback needs to consolidate gains before moving higher. Today there was modest profit-taking against the euro and Australian dollar. The Swiss franc was pressured by a slowdown in Swiss retail sales growth in June increasing speculation that the Swiss National Bank would cut interest rates at its policy meeting next month. Sterling fell versus the euro and traded near a 2-year low against the dollar after UK house prices recorded the largest annual drop in at least 6 years. The Canadian dollar declined as commodities traded near their lows for the year.

The USD/JPY fell modestly on carry-trade unwinding as US stocks declined on concern the US government will be forced to bail out Fannie Mae and Freddie Mac. In an uptrend since March, the pair is getting overbought. A large divergence between the price and RSI indicates that the rally may be running out of steam. The development in the equity market will likely determine the USD/JPY direction. If the stock market rally continues, the USD/JPY will possibly break the resistance and continue its ascent. However, the stock market is at strong resistance, so we keep our short USD/JPY position.

Financial and Economic News and Comments

US & Canada

The NAHB/Wells Fargo sentiment index held at 16 for a second month, indicating confidence among US homebuilders was unchanged in August at a record low, the National Association of Homebuilders/Wells Fargo reported. A reading below 50 means most respondents view conditions as poor. The index averaged 27 last year.

Net foreign investment in Canada rose for a seventh consecutive month in June. International investors bought C$7.2 billion in Canadian securities, Statistics Canada said, as “heavy acquisitions of Canadian bonds showed no sign of abating.” June's total brought net foreign investment in Canada for the second quarter to C$27.6 billion, setting a new record, Statscan reported.

Europe

Europe's trade deficit unexpectedly widened to €3 billion ($4.4 billion) in June, the largest since August 2006, compared with a €1 billion trade gap in May, as imports (€134.4 billion) outpaced exports (€131.4 billion), data from Eurostat showed.

The average price for a home in the UK fell 4.8% y/y in August to £229,816 ($426,929), the biggest yearly drop since at least 2002, after declining 2.0% y/y in July, according to the Rightmove house price index. House prices fell 2.3% m/m in August, the most since December, led by London. “The lack of mortgage finance is central to the problem….London, in particular, appears to be having its own special summer sale, with over 21,000 pounds off in a month,” Miles Shipside, commercial director of Rightmove, said. House prices in London fell 5.3% m/m and 3.8% y/y.

Asia-Pacific

Japan's leading economic indicators index was at 91.3 in June, marginally higher than the initial estimate of 91.2, according to data from the Cabinet Office. The coincident index, which measures the current state of the economy, stood at 101.6, lower than the initial reading of 101.7. Overall, the figures point to a continued contraction in the Japanese economy.

Japan's leading economic indicators index was at 91.3 in June, marginally higher than the initial estimate of 91.2, according to data from the Cabinet Office. The coincident index, which measures the current state of the economy, stood at 101.6, lower than the initial reading of 101.7. Overall, the figures point to a continued contraction in the Japanese economy.

Japan's nationwide department store sales fell for a fifth consecutive month in July declining 2.5% y/y to ¥706.2 billion ($6.4 billion), as uncertainties about the economy and employment conditions hurt consumer spending, after falling 7.6% y/y in June, the Japan Department Stores Association said. Tokyo department store sales also fell for a fifth straight month declining 0.9% y/y to ¥174.8 billion, following a 7.4% y/y drop in June.

FX Strategy Update

Hans Nilsson
Capital Market Services, L.L.C.
www.cmsfx.com

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