EUR/USD Likely Testing Long-Term Uptrend

The dollar rose against its rivals Tuesday following better-than-expected US housing data as well as minutes from the latest FOMC meeting indicating Fed policy makers were done cutting interest rates but the timing of any rate increase was data dependent. The euro fell as Germany's GDP contracted in the second quarter and business expectations plunged. The yen declined on increased risk appetite following renewed financialmarket confidence. The Canadian dollar rose as crude oil prices increased on forecasts Hurricane Gustav may enter the Gulf of Mexico. Sterling dropped to the weakest level in two years as the British Bankers' Association said mortgages fell 65% y/y in July. The Australian dollar fell to the lowest level since January on carry-trade unwinding and speculation the Reserve Bank of Australia will cut rates.

The EUR/USD touched the lowest level since February 14 after the Ifo German business expectations measure dropped to the lowest level since 1993. The pair is down for a seventh consecutive week. There is significant support from the long-term uptrend in the 1.44-1.45 area. If this support is broken, the EUR/USD will fall to 1.35.

Financial and Economic News and Comments

US & Canada

• US new home sales increased 2.4% to a seasonally adjusted annual rate of 515,000 in July, slower than the consensus expected 525,000 pace, after dropping to a revised, 17-year low in June, data from the Commerce Department showed. New home sales dropped 35.3% y/y. Sales rose in the Northeast and West but declined in the Midwest and South. The inventory of unsold homes fell for a consecutive second month, to 10.1 months' supply at the current sales pace in July; still, the number of unsold homes remains at historically high levels. The median price of new homes sold was $230,700 in July, down 6.3% y/y. The average price of new homes sold was $294,600, down 4.1% y/y.
  

• US home prices in 20 metropolitan areas fell 0.5% m/m in June, with nine areas reporting gains compared with seven in May, according to the S&P/Case-Shiller home price index. Denver and Boston posted monthly price gains in June while Phoenix was the worst performer. The June performance showed some improvement from monthly declines of 2%-2.5% m/m that occurred earlier this year. Home prices dropped 15.9 y/y, less than expected. The S&P/Case-Shiller quarterly data for nationwide home prices showed a 2.3% q/q decline in Q2, compared with a 6.8% q/q drop in Q1.
  

• The US home price index by the Office of Federal Housing Enterprise Oversight showed home prices were unchanged m/m in June.
• The Conference Board US consumer confidence index improved for a second month in August rising to a higher-than-expected 56.9, due to the decline in gas prices since mid-July, following levels of 51.9 in July and 51.0 in June, which was the lowest since 1992, data from the Conference Board showed. However, consumers' assessment of current conditions declined, and the percentage of those describing jobs as 'plentiful' fell for a consecutive seventh month.

• The Richmond Fed manufacturing index stalled for a second month in August at -16, unchanged from July, the Federal Reserve Bank of Richmond said. The shipments index improved to -13 in August from -23 in July, while the new order volume component fell to -22 from -17. The employment index weakened, dropping to -12 from -5. The prices paid index declined to 3.65 from 4.41, while the prices received fell to 2.74 from 3.34. Overall, the figures indicate manufacturing activity in the US Mid-Atlantic states remained weak in August.
• Federal Reserve officials lowered their economic forecasts at their last policy-setting meeting, according to the minutes of the August 5 FOMC meeting released today, and said they expect inflation to fall as economic activity 'was likely to remain damped for several quarters.' While Fed officials expect the next change in interest rates to be higher, most 'did not see the current stance of policy as particularly accommodative, given that many households and businesses were facing elevated borrowing costs and reduced credit availability due to the effects of financial market strains as well as macroeconomic risks.' While agreeing at their August meeting that the next change in rates will be to raise them, Fed officials reached no conclusion on the timing of such a decision. 'Although members generally anticipated that the next policy move would likely be a tightening, the timing and extent of any change in policy stance would depend on evolving economic and financial developments and the implications for the outlook for economic growth and inflation,' the minutes said.

Europe

• Germany's Q2 GDP fell a seasonally adjusted 0.5% q/q but rose 1.7% y/y, revised data from the Federal Statistics Office showed. In Q2 exports fell 0.2% q/q, imports dropped 1.3% q/q, building investment declined 3.5% q/q, investment in plant and machinery fell 0.5% q/q and consumer spending decreased 0.7% q/q, the Federal Statistics Office said.
  

• The Ifo German business climate index fell to a 3-year low of 94.8 in August from 97.5 in July, the Ifo Institute reported. The gauge of business expectations dropped to 87.0, the lowest since February 1993, when Germany was experiencing the worst recession of the past two decades. Current conditions eased to 103.2 in August from 105.7 in July. Overall, it was a bleak report with the expectation component indicating further contraction and a possible recession for the German economy.

• British banks granted 22,448 loans for house purchases in July, down 65% y/y, the British Bankers' Association said. The number of mortgages was 22,369 in June, the lowest since 1996. The value of mortgages fell to £3.2 billion ($5.8 billion) in July, the least since 1998, from £3.3 billion in June.

FX Strategy Update

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

©C2004-2005 Globicus International, Inc. and Capital Market Services, L.L.C. Any information in this report is based on data obtained from sources considered to be reliable, but no representations or guarantees are made by Capital Market Services, L.L.C. with regard to the accuracy of the data. The opinions and estimates contained herein constitute our best judgment at this date and time, and are subject to change without notice. Capital Market Services, L.L.C. accepts no responsibility or liability whatsoever for any expense, loss or damages arising out of, or in any way connected with, the use of all or any part of this report. No part of this report may be reproduced or distributed in any manner without the permission of Capital Market Services, L.L.C.