EUR/USD Has Biggest Monthly Fall

The dollar rose against most of its rivals Friday on better-than-expected US economic data and oil prices that remained in check despite storm concerns. Data on the Chicago PMI and Reuters/University of Michigan consumer sentiment index surprised to the upside, while July US personal income disappointed to the downside. The yen rose against other key currencies after Tokyo announced plans to spend about ¥2 trillion ($18 billion) to revive the Japanese economy. The euro fell modestly today and posted its biggest monthly decline since the euro began trading in 1999. Sterling declined as the UK economic outlook continued to deteriorate. The Australian dollar fell on more signs of a slowing Australian economy and narrowing interest rate advantage. The Reserve Bank of Australia is expected to cut its cash target rate next Tuesday by at least a 25-basis-point to 7.0%, the first cut in seven years. The Canadian dollar dropped after Canada's Q2 GDP showed sluggish economic growth. The Bank of Canada is likely to lower its benchmark rate next Wednesday.

The USD/JPY fell on stronger-than-expected Japanese economic data and lower US stock prices. Japanese consumer spending and industrial production rose more than forecast in July and inflationary pressures are building. The USD/JPY failed to penetrate the 110-area resistance and looks likely to test the uptrend that started in the spring. If this is broken, the USD/JPY will likely fall to the 102-area.

Financial and Economic News and Comments

US & Canada

US personal spending increased 0.2% m/m in July, matching consensus expectations, after rising 0.6% m/m in June, data from the Commerce Department showed. July personal spending grew at a slower pace as the impact of the tax rebates faded and a pickup in inflation eroded Americans' buying power. Personal spending rose 5.3% y/y.

Personal income decreased 0.7% m/m in July, the biggest drop since August 2005, after increasing 0.1% m/m in June. Personal income rose 4.2% y/y. Disposable personal income -- income after taxes -- fell 1.1% m/m in July after dropping 1.9% m/m in June.

The overall PCE deflator (consumer inflation) rose 0.6% m/m in July, up 4.5% y/y. The core PCE deflator, which excludes food and energy, increased 0.3% m/m in July, up 2.4% y/y. After adjusting for inflation, real consumption was down 0.4% m/m in July. Including upward revisions to June, real consumption increased only 0.7% y/y.

The Chicago PMI rose to 57.9 in August, the highest level since June 2007, from 50.8 in July, the National Association of Purchasing Management-Chicago said. A reading of 50 is the dividing line between growth and contraction. The index averaged 54.4 in 2007. The new orders measure increased to 60.2 in August, the highest level since September, from July's 53.5. The production gauge jumped to 63.4, the highest since June 2007 and biggest rise since October 2004, from July's 49.2. The prices paid measure fell to 80.6 from 90.7. Overall, the figures indicate expansion in business activity in the Chicago area.

The Reuters/University of Michigan final index of consumer sentiment rose to 63 in August, from 61.2 in July.

Canada's Q2 GDP grew at a less-than-expected 0.3% annualized rate to C$1.33 trillion ($1.25 trillion) on falling exports, following a revised 0.8% decline in Q1, data from Statistics Canada showed. The Canadian economy grew 0.1% m/m in June, matching expectations, after falling 0.1% m/m in May. The economy rebounded in June as construction increased 0.4% m/m and wholesaling climbed 0.5% m/m.

Europe

European economic confidence fell more than forecast to 88.8 in August from 89.5 in July, the European Commission said.

European companies and consumers see less chance of prices rising, European commission data showed. A measure of companies' selling-price expectations declined to 17 in August from 20 in July. Consumers' outlook for prices fell to 22 in August, below its average reading for the past 18 years, from 30 in July.

Confidence among euro-area manufacturers dropped more than expected to -10 in August from -8 in July, while sentiment among retailers also fell, according to data from the European Commission. Consumer confidence rose to -19 in August from -20 in July, remaining near a 5 1/2-year low.

European inflation unexpectedly eased to 3.8% y/y in August from 4.0% in July, Eurostat reported.

The euro-area unemployment rate remained at 7.3% in July, Eurostat said.

Asia-Pacific

Japan's core CPI, which excludes fresh food, jumped 2.4% y/y in July, indicating the Japanese inflation rate exceeded 2.0% y/y for the first time in a decade on higher food and gasoline prices, after rising 1.9% y/y in June, the statistics bureau said. Excluding food and energy, CPI rose for only the third time since 1998, climbing 0.2% y/y in July, after increasing 0.1% y/y in June. Tokyo's core CPI, a harbinger of nationwide inflation, rose 1.5% y/y in August, slowing for the first time since prices resumed rising in November, following the 1.6% y/y increase in July. The core CPI increases are unlikely to prompt the Bank of Japan to hike interest rates anytime soon because the Japanese economy is weakening and BOJ Governor Masaaki Shirakawa expects inflation will moderate as commodity costs ease.

Japan's ratio of jobs available to applicants declined for a sixth month to 0.89 in July, the lowest since October 2004, the Labor Ministry said. The jobless rate fell to 4.0% in July from 4.1% in June.

Japan's industrial production unexpectedly increased 0.9% m/m in July after falling 2.2% m/m in June, the Trade Ministry said. The July IP rise was not enough to revise the Japanese government's assessment that output is weakening as export growth slows.

Japan's household spending fell 0.5% y/y in July, a fifth monthly decline, the statistics bureau said.

Australia's new home sales fell 7.2% m/m in July, a 2-year low, the Housing Industry Association said. Total credit provided by banks and other finance companies increased 11.2% y/y, the slowest annual pace since 2002, the Reserve Bank of Australia said. The figures reinforce speculation the Reserve Bank of Australia will cut interest rates next week.

FX Strategy Update

Monday's Economic Calendar

Notes: N/A=not applicable/not available, ar=annual rate, sa=seasonally adjusted, nsa=non-seasonally adjusted, 3 mo=3 months, m/m=month-on-month, q/q=quarter-on-quarter, y/y=year-on-year, m=million, b=billion, t=trillion, unch=unchanged, r=revised, p=preliminary, f=final

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

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